Abaxx Technologies: An Alternative for Tellurian Investors?
Video: Providing an alternative investment option for Tellurian investors.
Transcript
Tellurian is the developer of the Driftwood LNG liquefaction project in Louisiana.
Given the stock’s decline, many Tellurian investors were disappointed to see Woodside Energy buying out the company for $1.2 billion (including debt).
With a buyout at just $1 per share, nearly all investors in the stock are losing money on this deal. The transaction is expected to close in October, this month.
Assuming the deal goes through, that leaves Tellurian investors wondering where they might want to invest next.
Well, let me introduce you to Abaxx Technologies. Full disclosure: I do own the stock, and it’s the largest position in my portfolio.
There are several benefits to Abaxx’s business model in comparison to Tellurian’s… or any large infrastructure operator, which I’ll get into later.
But Abaxx Technologies owns a recently launched commodity exchange in Singapore that currently offers LNG and carbon credit futures contracts. So, Abaxx is an in-direct way to take advantage of the increased usage of LNG in the future. Which is a market that’s expected to see demand growth of over 50% by 2035 according to S&P Global.
Now, growth of the LNG market has slowed to a certain extent because of things like worsening economic conditions globally, or the Biden administration’s pause on permitting new LNG projects. With that said, that pause was blocked by a district court judge and is currently going through appeals. So, there are going to be some bumps along the way, but the long-term growth trajectory is pretty clear. LNG is seen as a transitionary fuel since it’s attributed to lower levels of carbon emissions when compared to other fossil fuels.
Anyway, the interesting thing about LNG is that the market currently has no existing futures benchmarks. If you think about natural gas, it has Henry Hub futures in the USA and the Dutch TTF in Europe. Oil has Brent in Europe and WTI in the USA.
Liquified natural gas, on the other hand, has no physically settled futures benchmark. Meaning the buyer of a futures contract would take physical delivery of the commodity from the seller upon expiration of the contract.
One of the primary contracts used in the LNG market right now is the LNG Japan/Korea Marker, aka the JKM. This is a financially settled contract though, meaning there is no threat of physical delivery.
The use of contracts like Henry Hub or JKM leads to inadequate price discovery in the LNG market because those contracts aren’t designed to find the true price of LNG. That’s only possible when a buyer and seller physically trade the LNG, not a financial contract or one designed for a different commodity.
So, that’s the market opportunity that Abaxx is trying to take advantage of. And Abaxx hasn’t just built these contracts in a vacuum hoping the market would adopt them. They worked with over 100 different market participants in these industries to design these contracts with their input.
LNG is the focal point right now, but LNG and carbon credit futures contracts are just the beginning.
Nickel sulfate futures were meant to be ready at the launch of the exchange, but BHP closing down its nickel operations in Western Australia and the collapse of the Francis Scott Key Bridge in Baltimore led to complications with liquidity for the contract.
So, Abaxx is estimating that they’ll be able to launch the nickel contract in the fall, potentially along with the gold and/or lithium carbonate futures. There are already several new futures contracts lined up.
One of the key signs that Abaxx will likely succeed in scaling their exchange, scaling these contracts… is the management team’s history of both building and working at commodity exchanges in the past.
Most of the executives have impressive resumes, but to list some of the standouts…
Josh Crumb is Abaxx’s Founder and CEO, he was the former director and commodities strategist at Goldman Sachs. Also a director at the Lundin Group, a well known company in the commodity space.
Thom McMahon is also a Founder, and a Director. He was the Founder of AirCarbon Exchange. Also the former chief executive officer at the Singapore Mercantile Exchange, where he licensed and launched the exchange and clearinghouse before it was bought out in 2013.
Joe Raia is the CCO. He was the former global head of commodity futures at Goldman Sachs and global head of energy and metals futures at the CME/NYMEX. While at the NYMEX, he launched their ClearPort Clearing platform and created over 2000 different financial products during his tenure.
Dan McElduff is the President. He was a former senior director at NYMEX Natural Gas and Clearport, as well as the chief regulatory officer at ELX Futures Exchange. He collaborated with Joe Raia at the NYMEX.
Lastly, Jeff Currie joined the board as a director. He is a well known economist and was the former global head of commodities research and strategy at Goldman Sachs.
So, there’s a lot of experience in the commodity space here, a lot of Goldman Sachs executives. There have been delays along the way, but the team is clearly capable at launching and operating commodity exchanges.
The key things Abaxx is working on now to make sure the exchange is a success, is by launching new futures contracts as I mentioned earlier, and onboarding more market participants into their exchange ecosystem.
In particular, Abaxx is focused on onboarding more futures commission merchants (FCMs). Most commodity firms trade through an FCM or clearing member, which acts as an intermediary for buying or selling futures contracts. They also manage margin, and ensure the delivery of the asset upon expiration of a contract.
So, the more FCMs that Abaxx gets connected to its network, the more firms that will be able to trade on the exchange. Abaxx has two full FCMs connected, KGI Securities and StoneX. They also recently announced ADM Investor Services Singapore as a third. This is a subsidiary of Archer Daniels Midland for clearing services.
The big one they’re waiting for is the onboarding of Mizuho, one of the largest Japanese banks, and the largest financier in the LNG markets in 2022. We’ve been waiting on Mizuho for a while now, but once they’re finally onboarded, it should be a big boost for liquidity on the exchange as that will allow more participants in these markets to trade Abaxx contracts.
As I mentioned at the beginning of the video, there are a variety of benefits that Abaxx as a business has over the business model of a company like Tellurian.
Abaxx is an extremely high gross margin business. Commodity exchanges require little or even no additional capex to offer new futures contracts.
With that said, LNG exports are a pretty high margin business as well, but only when the terminals are completed. We can see that Cheniere Energy, which would be quite similar to Tellurian once their project was built, has operating margins of around 50%. That’s pretty solid.
But you can get similar, if not higher margins in the commodity exchange business, without all of the additional risks.
Abaxx still offers exposure to the growth of LNG thanks to what should be a successful LNG futures contract, but their exchange is already built. Abaxx is in the start of their growth phase right now.
Meanwhile, Tellurian was projecting first revenues in 2028. That’s a long time to wait, and that’s assuming the project was built on time.
Additionally, you don’t really need to worry about significant capex spend in the commodity exchange business. That makes it easier to grow. Obviously large infrastructure projects are going to take time and capital to build.
If there were any delays in building the Driftwood project, then that also creates the risk of needing to raise even more money. That could be dilutive to shareholders, or make the investment even riskier. We’re talking about billions of dollars in capex for Tellurian.
So, Abaxx offers significant upside, and less risk, in my opinion.
Here is a link to my full write-up providing the investment thesis for Abaxx.