Magellan Petroleum Corporation (MPET) threatens to become the poster child for the “good deal” gone bad.
Teetering at the brink of bankruptcy, MPET is an old time oil and gas company that executed a reverse split last year, then recently fell into a reverse takeover on hopes of floating an $8 billion idea that won’t be operational until 2025. The plan is to build a liquefied natural gas terminal on 477 leased acres in Louisiana. The idea is stoked by a man who has been vilified by activist investor Carl Icahn.
The stock has rocketed on this plan … but is now precariously positioned for decline.
Investors may find other viewpoints here and the company website here. Meanwhile, TheStreetSweeper presents the immense risks facing MPET investors.
*1. Billions: Cost of MPET Plan
At the core of the MPET merger is Driftwood LNG. Former Cheniere Energy CEO Charif Souki filed a request in May with the Federal Energy Regulatory Commission (FERC) to begin an environmental review process for Driftwood.
The new company would plan to produce and export 26 million tons per year of liquefied natural gas or LNG in facilities in southwest Louisiana, making it the seventh company to build a natural gas terminal in the area. Construction is expected to begin in 2018 and will likely take seven years, with the first plant operational in 2022.
Company officials expect the project to become fully operational the second quarter of 2025. Construction costs are expected to be about $8 billion.
In contrast, Denver, Colorado based oil and gas company MPET had turned into a shell of a company forced to sell its assets to fund operations. The company operates under the cloud of going concern issues and earnings have been negative. Over the last 12 months, the earnings per share have been in the red at $-9.17.
(Source: E-trade)
At the end of March, MPET’s available cash had fallen to $131,000.
*2. “This Is Insane”
Yet this odd pairing of a dying company with a startup anticipating billions of dollars in expenses has captured retail investors’ imagination and pushed MPET shares up over 400% since the Aug. 3 merger announcement.
The reverse takeover of MPET will allow Mr. Souki to take his new company public, Tellurian Investments, with business partner Martin Houston.
Just last December, billionaire shareholder Carl Icahn ousted Mr. Souki from Cheniere.
He said Mr. Souki was “taking $80 million out, and any stock he could sell, he sold.”
Mr. Icahn continued his comments on Mr. Souki, according to Bloomberg:
“So here he is doing this, going in with one idea after another. I looked at this and said, ‘This is insane. This is the problem.’”
“I’ll tell you know what he knew — he knew how to go almost bankrupt, because that’s what happened to him.”
Cheniere approached bankruptcy in 2008 as Mr. Souki developed a multibillion-dollar plan to import liquefied natural gas into America, but the U.S. had become awash in gas production from shale drilling. Cheniere was left with huge, expensive LNG tanks and nearly empty pockets, as Forbes wrote.
Then Mr. Souki pushed an even more expensive idea of exporting some of that U.S. gas overseas. But the collapse in oil prices came as the costly plan was slowly unfolding.
(Source: Yahoo Finance)
Cheniere shares fell by more than half in 2015, attracting Mr. Icahn’s stake in the company in August 2015, two seats on the board and an interest in examining Mr. Souki’s ideas.
According to Bloomberg’s April 2016 article, after Mr. Souki was fired, Mr. Icahn commented that Mr. Souki had “harebrained ideas.”
Under the MPET deal, each share of Tellurian will be converted into the right to receive 1.3 share of MPET. The company will issue about 122 million shares of common stock to Tellurian shareholders – about 95% of MPET’s outstanding stock. This dilutive deal is expected to be completed in the last quarter of 2016.
Yes, that’s 122 million shares added to the 5.8 million outstanding. So at around $5 per share the market cap exceeds $600 million … for a company that has nothing but an idea.
*3. Oversupplied: Gas
The International Energy Agency asked an interesting question in its gas demand forecast.
“The slowdown in Asian gas demand that started in 2014 intensified in 2015, prompting a rare decline in the region’s LNG imports and pushing prices to new lows. As the world prepares to welcome a large wave of new LNG projects, market players are left with one burning question: where will all that gas go?”
An oversupply through 2021 will continue to pressure spot gas prices across the globe, according to the Oil & Gas Journal.
“We see massive quantities of LNG exports coming online while, despite lower gas prices, demand continues to soften in traditional markets. These contradictory trends will both impact trade and keep spot gas prices under pressure.” Fatih Birol, EIA executive director told the Oil & Gas Journal. Cheaper coal and continued strong renewables growth were blocking gas from expanding more rapidly in the power sector, Birol added.
Natural gas spot prices have drifted downward for some time. Back in July 2005, gas fetched $7.63 per million BTU. In July 2016, the price averaged just $2.82.
The price has down-trended from around $3.48 in December 2014 to $1.93 last December.
Natural gas trading reflects the falling trend:
(Source: DailyFX)
Meanwhile, the competition is leaving MPET in the dust:
(Source: FERC.gov)
*4. China: Producing More Natural Gas
The company hopes China will become a customer as the US Energy Information Administration reports that country is expected to consume more natural gas.
Unfortunately for MPET, China is also expected to produce more natural gas.
The EIA report notes:
*In the IEO2016 Reference case, natural gas consumption in China totals 9.1 Tcf in 2020, or about 6% of the country’s total energy consumption. In 2040, the natural gas share of China’s energy consumption is 15%—still less than coal’s 44% share.
*In China alone, production increases by 15.0 Tcf as the country expands development of its shale resources. The United States and Russia increase natural gas production by 11.3 Tcf and by 10.0 Tcf, respectively.
*Total natural gas production in China, the United States, and Russia accounts for nearly 44% of the overall increase in world natural gas production.
*Conclusion
The deal involves MPET issuing 122 million shares to a company with leased land and an idea. The deal-makers have added around $37 million to this reverse merger that the market has suddenly valued at a ludicrous $700 million-plus.
The men behind the deal would have probably been pleased if the stock had remained around $1.40 per share for a valuation of about $170 million – or nearly quadruple their money.
It would be surprising if this idea works a decade from now – sorry to say most of these just won’t make it nearly that long. Meanwhile, investors will endure a ton of dilution.
This is ludicrous. Complete bubble insanity.
Once retail investors understand the situation, we believe this stock will get trampled back down to $1.30 per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in MPET and stand to profit on any future declines in the stock price.
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Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.
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