Roni Biron
13/10/2015
Anti-trust deadlock holds back Leviathan's regulatory clearance Government and Knesset approvals of the new regulatory framework have not been sufficient to obtain anti-trust clearance for Leviathan, as Minister of Economy, Arie Derhi, is reluctant to exercise section-52 (needed to by-pass anti-trust resistance on political/geo-political grounds).
Transferring section-52 authority to the Prime Minister would be the faster and safer way out, but gaining Knesset majority is not guaranteed and, according to Globes, ran one Knesset member short in the last voting session.Should a majority not be obtained, the next anti-trust commissioner (yet to be appointed) will need to decide on the matter, a process that may take several months.
Transferring section-52 authority to the Prime Minister would be the faster and safer way out, but gaining Knesset majority is not guaranteed and, according to Globes, ran one Knesset member short in the last voting session.Should a majority not be obtained, the next anti-trust commissioner (yet to be appointed) will need to decide on the matter, a process that may take several months.
Other avenues may be tried as well but with little certainty. We expect Leviathan phase- 1 to be sanctioned within 9-12 months from anti-trust clearance, followed by 3.5-year development. In the meantime, the business environment is not getting easier While Israel is busy sorting out regulation, the drop in oil prices and ENI's sizable find off-shore Egypt have somewhat complicated matters for Leviathan on the commercial front. In particular, we believe these events take away some of the regional leverage from Tamar and Leviathan and may impact pricing of key agreements.
On the other hand, we still see a basis for the MoUs with BG and UFG given their orientation to the export market and the large scope of untapped domestic demand in Egypt.
Valuation: Taking a scenario-based approach, Neutral stance In case of positive development on the regulatory and commercial fronts, we see Delek Group as the main vehicle for international investors and Ratio Oil as most geared to Leviathan. That said, we see a wide valuation range for Leviathan depending on its scope and pricing. The main variables, in our view, are BG and long-term Brent price.
On the other hand, we still see a basis for the MoUs with BG and UFG given their orientation to the export market and the large scope of untapped domestic demand in Egypt.
Valuation: Taking a scenario-based approach, Neutral stance In case of positive development on the regulatory and commercial fronts, we see Delek Group as the main vehicle for international investors and Ratio Oil as most geared to Leviathan. That said, we see a wide valuation range for Leviathan depending on its scope and pricing. The main variables, in our view, are BG and long-term Brent price.
Given the low visibility, we show 3 scenarios for Leviathan in pages 6-7, assume basecase risked NPV of $5.8bn ($1.6/boe) and take a Neutral stance on the Israeli partners. With this note we also apply taxation on the LP vehicles (20% of NPV). Our price targets are NAV-derived using DCF for Tamar and Leviathan (see Figure 1 for our price target and rating changes).
Leviathan searching its way out of limbo
Since 2009, two of the world's largest deep-water gas discoveries were announced off-shore Israel by Delek Group/Noble Energy led partnerships. Tamar was announced a discovery in early 2009 and begun flowing gas to the Israeli market in mid-2013. It has estimated reserves of 11 Tcf. Leviathan was announced a discovery in late 2010 and is estimated to hold 22 Tcf. Unlike Tamar, 50-75% of Leviathan is aimed at the export market. A third sizable discovery, Aphrodite, followed in 2013 in Cypriot Block-12 and is estimated to hold over 5 Tcf. Other exploration activities in the basin by different entities have not been successful.
While Tamar's development was one of the fastest on record, Leviathan has yet to be sanctioned due to regulatory delays and lack of anti-trust clearance. We note companies involved. Tamar has already transformed Israel into a self-sustained
energy market and Leviathan could turn it into a net exporter. This should boost Israel's GDP through the balance of trade and a government take of 50-60%.
In addition, the development of Leviathan as an export hub could unlock geo-political opportunities. Finally, a second connectivity to the shore is essential for redundancy and security of supply. With that in mind and wary of anti-trust considerations, we believe the importance of developing Leviathan cannot be understated and is high on the political agenda. In this note we discuss the regulatory impediment and commercial challenges and offer three scenarios.
In addition, the development of Leviathan as an export hub could unlock geo-political opportunities. Finally, a second connectivity to the shore is essential for redundancy and security of supply. With that in mind and wary of anti-trust considerations, we believe the importance of developing Leviathan cannot be understated and is high on the political agenda. In this note we discuss the regulatory impediment and commercial challenges and offer three scenarios.
The regulatory challenge
Background
Last December Antitrust Commissioner David Gilo decided not to go through with an earlier agreement with Delek and Noble relating to their cross holdings in Tamar and Leviathan, a pre-requisite for the sanctioning of Leviathan. According to Gilo, the agreement which included the sale of Karish and Tanin was not sufficient to ensure a competitive gas market. As a result, Professor Eugene Kandel, head of the National Economic Council (until recently) has been allocated the responsibility of coordinating a new regulatory framework with the relevant ministries, Antitrust Commissioner, and E&P partners. Avenues examined ranged from ownership changes, separate marketing, and price intervention. According to TheMarker, a draft proposal in February included Delek selling out of Tamar in 3 years, separate marketing in Leviathan and a price cap on domestic prices.
The Israeli elections in March, however, led to a softer version and the resignation of Gilo, opening the door for a highly scrutinised public hearing process and non-binding consultation in the Knesset. These have resulted in two rounds of adjustments to the framework before its approval by the government and the Knesset.
The Israeli elections in March, however, led to a softer version and the resignation of Gilo, opening the door for a highly scrutinised public hearing process and non-binding consultation in the Knesset. These have resulted in two rounds of adjustments to the framework before its approval by the government and the Knesset.
The shorter and safer way out of this procedural deadlock is to transfer section-52 authority from the Minister of Economy to the government or the Prime Minister. This, however, requires the approval of the Knesset. Unlike the framework approval, the government is still seeking Knesset majority for this tight vote and according to Globes, was one Knesset member short in the last voting session. Other political or legislative avenues may also be contemplated in order to avoid a lengthy delay but with little certainty. We note that this issue is high on the Prime Minister's agenda. We expect Leviathan phase-1 to be sanctioned within 9-12 months from anti-trust clearance followed by 3.5-year development.
Key pillars of the framework
Ownership changes
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Delek will sell out of Tamar within 6 years.
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Noble Energy will dilute its working interest to 25% (minimum for operator status) and give up any veto rights.
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Delek and Noble will sell out of the smaller Karish and Tanin discoveries (3 Tcf in total) within 14 months.
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No ownership changes in Leviathan.
Roni Biron Analyst
הנתונים, המידע, הדעות והתחזיות המתפרסמות באתר זה מסופקים כשרות לגולשים. אין לראות בהם המלצה או תחליף לשיקול דעתו העצמאי של הקורא, או הצעה או שיווק השקעות או ייעוץ השקעות ב: קרנות נאמנות, תעודות סל, קופות גמל, קרנות פנסיה, קרנות השתלמות או כל נייר ערך אחר או נדל"ן– בין באופן כללי ובין בהתחשב בנתונים ובצרכים המיוחדים של כל קורא – לרכישה ו/או ביצוע השקעות ו/או פעולות או עסקאות כלשהן. במידע עלולות ליפול טעויות ועשויים לחול בו שינויי שוק ושינויים אחרים. כמו כן עלולות להתגלות סטיות בין התחזיות המובאות בסקירה זו לתוצאות בפועל. לכותב עשוי להיות עניין אישי במאמר זה, לרבות החזקה ו/או ביצוע עסקה עבור עצמו ו/או עבור אחרים בניירות ערך ו/או במוצרים פיננסיים אחרים הנזכרים במסמך זה. הכותב עשוי להימצא בניגוד עניינים. פאנדר אינה מתחייבת להודיע לקוראים בדרך כלשהי על שינויים כאמור, מראש או בדיעבד. פאנדר לא תהיה אחראית בכל צורה שהיא לנזק או הפסד שיגרמו משימוש במאמר/ראיון זה, אם יגרמו, ואינה מתחייבת כי שימוש במידע זה עשוי ליצור רווחים בידי המשתמש.
