Delek may struggle to obtain Tamar financing

Ron Steinblatt

Delek needs to secure almost $1 billion by June 2012 at the latest.

Delek Group Ltd. (TASE: DLEKG) controlling shareholder Yitzhak Tshuva is concerned about raising funds to develop the Tamar natural gas field. It will cost $3 billion to build a production platform and infrastructure to carry the gas from the rig to the coast. Delek needs to secure almost $1 billion by June 2012 at the latest.

In the worst case scenario, where Delek fails to raise the necessary funds for their portion of developing Tamar, Tshuva will find himself pushed out of the natural gas project.

Granted, it is hard to imagine such a scenario, yet in the financial markets' current fragile situation, where the difficult credit climate is still threatening securing such a large amount of financing, this is no simple matter, even for Tshuva.

The negotiations are dragging on

The cost of developing Tamar infrastructure is estimated at $3 billion, of which Tamar partners Delek Group, Noble Energy Inc. (NYSE: NBL), Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), and Alon Natural Gas Exploration Ltd. (TASE: ALGS) have already invested $1.2 billion.

Well operator Noble Energy, says it will fund its part of Tamar's development from its own sources and Isramco has already signed a $750 million financing agreement with a syndicate led by Deutsche Bank AG (DAX: DBK; NYSE: DB). However, Delek's two subsidiaries, Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L), as well as Alon Gas, have not yet signed any financing agreement. These last three companies have been in negotiations (including sending drafts back and forth) with Barclays Bank plc (LSE: BARC) and HSBC Holding plc (LSE: HSBA; HKSE: 005; NYSE, Paris: HBC) for some time.

Delek Drilling and Avner have each been financing their part of Tamar by $190 million bridge loans, and Alon Gas with a $50 million bridge loan from Barclays Bank plc (LSE: BARC) and HSBC Holding plc (LSE: HSBA; HKSE: 005; NYSE, Paris: HBC) obtained in June 2010. The loan is due to be repaid at the end of 2011, but under certain conditions, it may be extended for an additional six months at a higher interest rate, which is currently 4%. There is also a possibility to increase the interim financing by $100 million.

These bridge loans are expected to be replaced by long-term financing agreements similar to the one Isramco signed, which is valid thru 2024. The financing will be secured by cash flow from gas sales.

The main problem preventing the signing of this financing agreement is the absence of a long-term contract to provide Israel Electric Corporation (IEC) (TASE: ELEC.B22) with natural gas from Tamar. Apparently, the foreign banks will not agree to such a high level of financing in the current market without knowing for certain that there will be a steady cash flow that will enable the borrower to repay the loan.

Negotiations with the IEC are due to be concluded by the end of the year, but since it is a government company that is driven not only by economic considerations, it is impossible to know for certain when the agreement will be signed.

If Delek does not succeed in signing a financing agreement by the end of June 2012, it will need to finance its share in the development of the gas field by either raising capital or some other way. In the worst case scenario, if Delek does not succeed in raising capital, it will lose all of its rights to Tamar to his partners in the project.

Noble Energy owns 36% of Tamar, Isramco owns 28.75%, Delek units Avner and Delek Drilling each own 15.625%, Isramco owns 28%, and Dor Alon Energy in Israel (1988) Ltd. (TASE:DRAL) unit Alon Gas 4%.

Published by Globes [online], Israel business news - - on October 9, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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