Magellan Petroleum Corporation or MPET stock is under a lot of debate.
Most market experts feel that the valuation of the stock is unfounded.
In fact, some have even slammed the valuations as treacherous.
The MPET stock is seen as one of the extreme risk plays.
This is primarily on the basis of the business restructuring plan.
The reverse merger with Tellurian Investments is a key driver for the spike in prices.
However, experts are not that gung-ho about this plan to build a LNG terminal.
From worries about a brand new foray to the potential expense involved, there are many concern areas.
The valuation is bloated as per most market analysts.
They feel the $15 billion-plus cost of the new LNG terminal is steep.
To top it, the 5-year construction period is a big risk.
To make matters worse, the MPET stock also has a $168 million lawsuit to worry about.
One of the major investors has misunderstood, and there is a huge amount of uncertainty.
The brokerage views on the MPET stock price also highlight the uncertainty surrounding it.
Most experts feel that the intrinsic risk is quite high.
The most technical analysis also highlights the risk zone.
Well, you can, of course, argue that the upside is not capped.
The exact prospect of the LNG foray is not determined either.
In fact, there is a select group of analysts who feel it is close to fair value levels.
But is it justified to invest in this stock going forward?
Well, the fundamentals of the oil and gas sector have to study in details.
That apart, there are many other risks involved.
Understanding the Magellan Business
It is important to get a grip on overall business basics.
This company was founded in 1957 and has been operational since then.
It is primarily engaged in oil exploration and its development.
They are also involved in production and sale of oil and gas reserves.
They have reserves across United States, Australia, UK and Canada.
The business model replicated a typical oil and gas play.
Tellurian Investments acquired the company in February, 2017 in a reverse merger.
The current focus is more on the development of liquefied natural gas terminal.
The management is now concentrating on this aspect of the business.
They currently own exploration blocks off the coast of Northern Territory, Australia.
It has now changed its name to Tellurian Inc.
The volumes on the stock post the reverse merger has been fairly low.
Moreover, despite the gains in the oil and gas sector, MPET stock prices have been in the negative zone.
Even if you see the 1-year return, it is down 16%.
So, on the whole, the fundamental prospects of the stock are questionable.
It highlights some gaping risks associated with the core business of the company.
MPET Stock Revenues: A Major Problem
The basic of any business is in the amount of revenue that it can help generate.
It is this revenue that goes on to decide the ultimate success or failure of the business.
It is also a measure of the overall profit and loss parameters.
But what happens when this crucial element is missing from the core business concept.
Well, unfortunately, that is the truth of the Tellurian takeover of Magellan Petroleum or MPET.
Though investors were very excited about this, it has failed to deliver any results yet.
Tellurian is effectively an outcome of Charif Souki’s grudge against Cheniere Energy.
He was kicked out of Cheniere as CEO in late 2015.
He, then, merged with MPET to create a multi-billion dollar LNG terminal.
But unfortunately, in the past year or so the combined revenue is around $30,000.
If you compare the US job statistics, this is pretty much what a fast food employee makes a year.
The source of this revenue is from a lawsuit payment from Parallax Enterprises.
Parallax was sued by Cheniere Energy, Souki’s former employee.
But apart from that, the overall revenue inflow channels look very bleak at the moment.
There is a big question mark on whether Magellan or MPET can continue its operations.
Moreover, Tellurian too failed to come up with any distinct revenue channels.
Therefore, you can understand how bleak is the scope of potential revenue generation.
In this context, you can well understand that the combined entity is set to face a liquidity crunch.
Give the progress of the business process, a long-term liquidity crunch may set in.
That is one of the biggest red flags against this LNG play.
Reverse Merger: A Big Negative
In fact, if you pay attention to the terms of the reverse merger, that is also a major concern.
This is because every merger is supposed to add value to the company and shareholder’s interest.
However, that’s not exactly the case for MPET.
Though the share price spiked to dangerous levels post the news, is there really anything to cheer?
Let us analyze the terms of the reverse merger minutely.
That will help answer some crucial points in this context.
After all, the stock also spiked up on hopes of a better future projection.
According to the terms of the arrangement, every Tellurian share was converted into a right.
These converted rights were to get 1.3 shares of Magellan Petro each.
So a total of 122 million common shares had to be issued.
This comprised of nearly 95% of the outstanding Magellan common stock.
The Tellurian shareholders benefited from this entire arrangement.
Needless to mention that this new arrangement sufficiently buoyed the street.
GE Oil and SA Total made fresh investments based on this news.
GE Oil and Gas invested about a total of $25 million.
On the other hand, France-based SA Total put in over $200 million in Tellurian.
They bagged nearly 23% of the Tellurian in exchange of the $200 million-plus investment.
This put the total Tellurian valuation at $800 million.
The question is how can this impact the future valuation?
Can just this interest shoot up prices and make it a multi-billion dollar venture?
This valuation call is extremely tricky.
It is because share prices rallied on the basis of a pre-circulated arrangement.
However, the math just did not add up.
The valuation call just did not seem to match.
But what was the reason, apparently none at all!
Declining Charm of Magellan Stock Shares
As the merger gets approval, you realize that Tellurian investors get the maximum chunk of shares.
They practically walk away with over 95% of the overall shareholding in the merged entity.
This is because every 1 Tellurian shares will be converted to 1.3 MPET shares.
So, you do not have to be an expert to understand the implications.
The MPET shareholders get a raw deal.
They get around less than 5% of the share in the newly merged entity.
So even if we assume that the arrangement makes financial sense, the shareholders get a raw deal.
Needless to mention that this did not go well with a majority of investors.
People have been investing in this stock as news of the merger gained currency.
The prices of the share have been going up since.
Quite a few investors grabbed every available opportunity.
The result, the MPET shares that they held suddenly became less valuable.
Of course, the merger proceedings went as per plan.
But it failed to bring the kind of value that the shareholders were looking for.
This is seen as a big negative for the MPET shares.
Before the merger, it was the MPET shares that had the biggest share.
However, the interest of the MPET shareholders gets severely compromised.
This coupled with the fact that the revenue output is next to zero became a key concern.
Even f you look at future projections, it can hardly bring any solace.
This is seen as one of the biggest negative revolving around the reverse merger.
So many investors, who managed to cash out their shares, did so.
After all, who will like to carry a bunch of liabilities with them?
Difficult to Justify Post Merger Valuation
We have already mentioned this key point.
It is undeniably one of the biggest shortcomings of the entire merger deal.
But the question is, have you seen the post-merger?
You will be surprised to see the complicated value derivations.
As the merger gets approval, the Magellan or MPET shares rise to 5.88 million.
However, there is no clear explanation of this dramatic rise in share count.
More importantly, there is no clarity as to why and how the number of shares rises.
Now given the phenomenal rise in the share price, you should think about the actual valuation of the stock.
Needless to mention, these are treacherous levels indeed.
The MPET share valuations don’t just look dangerous, the scope of a sudden, sharp fall increases.
So just as meteorically the number of shares and the valuation rose, there is a chance of correction too.
In the absence of definitive revenue flow, the only factor that pushed investors was the stretched valuations.
However, when it becomes difficult to justify that, it can only worsen the situation.
The question is just how and why the shares rose.
It is time that the MPET and the Tellurian investors came clean with the arrangement.
In the absence of any management view, everything is in the realms of assumption.
But we all know, in case of stock market dealings, assumptions are dangerous.
Unless and until there is clarity, assigning the value to any stock is difficult.
In that context, it then becomes difficult to stomach the multi-billion dollar valuations that MET represents.
The management of either of two companies has not bothered with clarifications.
In that context, the shareholders have been undeniably taken for a ride without consent.
This is surely against the basic shareholder interest.
A Billion Dollar Question
Even if we add up all available data, Magellan or MPET’s valuation after the merger cannot exceed $500 million
Now the billion dollar question is how it will finance the massive LNG terminal construction?
To me ever more relevant, why did they get into the merger at all?
The rationale of the entire deal is completely off.
The total estimated cost of building the LNG terminals is close to $16 billion.
Tellurian does not have a definitive revenue flow in place.
But quite a steep amount is being spent every year in the overall upkeep.
The Tellurian expenses alone come close to $10 million.
That from a company with no revenue line-up is very worrying.
The much-touted Louisiana project is unlikely to be ready anytime soon.
The best bet is that it will be operating in some distant future.
The company targets 2022 for delivering LNG, but this can easily prolong to 2025.
This timeline is unrealistic, to say the least.
The time they have outlined may not even be sufficient to build the facility, forget supply.
Moreover, the company in this area is extremely stiff.
Magellan has to work in an extremely intense competition zone and shine for sustainability.
The Lawsuit Investigation
As though the problems were any less, MPET has some added legal woes.
These lawsuits are more of legacy problems that are passed on to them due to the merger.
However, that said, the fact is that Magellan has to deal with them.
A New York-based firm has announced a series of investigation of the reverse merger.
The key issue is the exact way this entire merger has been handled.
There is also probe underway on the potential violation of US SEC provisions or other federal laws.
If proved even in a minuscule way, this can easily lead to a gamut of lawsuits and undue expense.
These investigations and future legal action will be harmful to the company in many ways.
It will no doubt create a major dent in the expenses.
However, more than that, it may harm the company’s reputation and goodwill to a great extent.
This can also hurt future profitability and the option of gaining additional contracts.
Moreover, these legal hassles can be rather time-consuming.
So the management has to divide its time between legal matters and product ideation.
Needless to mention, this will harm the final output.
The question then will be what will be the management’s priority.
That will also have a direct bearing on the future profitability.
That I am sure is not a stock that you will like to block your money in.
Profitability is undeniably one of the most important factors.
Volatility Index Gives Warning
If you are still looking at signs to justify the worry about MPET stock price, think again.
Perhaps even better go through the recent volatility index.
That will help you understand the complexity of the current situation.
The RSI indicator clearly shows that the Magellan stocks are overbought at current levels.
This typically sets the stocks up for potential sell situation.
On the RSI or the relative strength index, 70 is a psychologically important figure.
It indicates a level beyond which stocks are considered overbought.
But for MPET, the RSI is very close to 90.
The overbought signs are therefore very clear.
The market has given a clear indication about how stretched the current valuation is.
When you analyze this reading in perspective of other worrying factors, the writing is quite clear on the wall.
Investors have to make a beeline for the potential sale of shares.
But the question is one also needs buyers.
In the absence of potentially willing buyers, shareholders are practically stuck.
The RSI valuation also caps future upside.
Investors will be careful, and any further spike in valuation is unlikely.
A detailed analysis of MPET and the eventually converted Tellurian Inc shares is worrying.
The MPET stock pricing both in terms of fundamentals and technical parameters indicates red flags.
The valuation is extremely stretched, volatility in prices very high.
Moreover, production and revenue generation seems unlikely in immediate future.
The resource channelization for finishing the LNG terminal is also questionable.
Keeping all these factors in mind, it is a big avoid on MPET.
If you really want a play in energy sector or oil and gas industry, don’t try MPET stock.
There are many fundamentally strong counters that can generate better value than MPET stock.