Insights

Why Shares of Tellurian Plunged 38% in June

What happened

Giving back a large portion of the 55% gain they had made through the first five months of the year, shares of Tellurian (NYSEMKT: TELL) plummeted last month. The developer of natural gas infrastructure saw its stock fall 38% in June, according to data from S&P Global Market Intelligence.

Among the prospect of shareholder dilution, an analyst’s bearish take on the stock, and falling energy prices, investors felt little confidence that this natural gas stock could energize their portfolios.

So what

It didn’t take long once June began before Tellurian’s stock started to slip. On the first of the month, in fact, the stock closed nearly 6% lower than where it had ended on the previous day. Fearing the prospect of share dilution, investors clicked the sell button after learning that Tellurian had offered $500 million in senior secured convertible notes due in May 2025 and that have an initial conversion price of $5.724.

In addition to Main Street investors, Wall Street also raised a yellow flag in response to Tellurian’s issuance of convertible notes. On June 6, Spiro Dounis, an analyst at Credit Suisse, cut his price target on Tellurian’s stock to $7 from $8. According to Thefly.com, Dounis based his price target reduction on the company’s surprisingly high issuance of equity. Despite the lower price target, Dounis maintains an outperform rating on the stock.

Lastly, the volatility in the energy market represented another catalyst leading investors to exit their positions.

Henry Hub Natural Gas Spot Price data by YCharts.

From the beginning of the year through the end of May, the U.S. benchmark, the Henry Hub spot price of natural gas, had risen 122%. In June, however, the trajectory headed in the other direction, resulting in the Henry Hub natural gas spot price falling more than 21%.

Now what

With Tellurian choosing to raise capital through the issuance of convertible notes, it’s unsurprising that some investors chose to sell their shares. Investors who recognize the long-term growth potential in Tellurian as it expands its natural gas infrastructure, however, should stay the course. Tellurian has yet to generate cash flow, so it’s expected that the company will have to raise capital to finance its projects.

Moreover, considering the high correlation between energy prices and the stock prices for companies that deal in the related commodities, the drop in Tellurian’s stock last month isn’t all that surprising.

Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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