Following the plunge in the share price of Delek Group Ltd. (TASE: DLEKG) in the past week, due to investors' concerns about the huge deal for its subsidiary Ithaca's acquisition of Chevron's North Sea assets, controlling shareholder Yitzhak Tshuva soothed the worries during a conference call today with investors and analysts. Investors liked what they heard, and Delek Group's share price responded with a 6% jump. The share price is still down 14% since the deal was announced, pushing the company's market cap down to NIS 6.5 billion.
"In the first three years following the deal, Ithaca's projected EBITDA is $1 billion a year, due to Ithaca's accumulated losses, and $600-700 million a year in subsequent years. We recently received indications from Chevron that the acquired company has a $200 million cash surplus that did not exist when the deal was signed. This is one of the reasons that Ithaca decided to reduce the volume of its bond issue last week by $200 million to only $500 million," Tshuva stated at the beginning of the call.
Tshuva said, "Closure of the deal is slated for the fourth quarter, probably in November. We want to close the deal as soon as possible because of Ithaca's tax asset - accumulated losses. Once it is closed, we will save up to $2.2 billion on taxes. Final payment for Chevron's assets will be $1.5 billion because of the terms agreed with Chevron. In the coming years, Ithaca is planning early repayment of all of its bank loans and a large part of the bonds, so that three years from now, it will have a $1 billion surplus."
Concerning a possible offering by Ithaca, Tshuva remarked, "In the framework of the acquisition of Chevron's assets, there is another extremely important asset - the infrastructure and drilling platforms that Ithaca is buying as part of the deal. After the acquisition, it will be possible to split Ithaca into two companies: an infrastructure company and an oil and gas distribution company, and an offering can be held for one or both of them in London. We are now discussing a pre-IPO sale of shares in Ithaca amounting to up to 20% of its capital with a number of funds and investors. This will give Delek Group a lot of money."
Addressing the need to reduce the risk in the deal resulting from oil price fluctuations, Tshuva said, "As of now, we have made a hedging deal for 32 million barrels at $65 a barrel. By the time the deal is closed, we intend to hedge 18 million more barrels, ensuring us a $65 per barrel price, which will guarantee $3.3 billion and give us peace of mind."
"The deal is very good, with enormous potential. It does not burden the group, and will generate a substantial cash flow for Ithaca, which can be used to distribute profits to Delek Group. We are in advanced negotiations with a number of parties who have expressed willingness to inject the necessary capital. In sum, this is a rare and excellent deal," Tshuva summarized.
Asked about the money that Delek Group will have to bring in order to complete the deal, the group today stated, "The amount is $450 million, and we have several sources for it - it can come from the sale of the holding in Phoenix, a pre-IPO sale of shares in Ithaca, or other sources. We feel very comfortable with the deal and the various options we have for raising this amount."
"Working reservoirs producing oil"
Through Ithaca, Delek Group reported in late May that it was acquiring the operating company of energy giant Chevron in the North Sea, which owns 10 producing oil and gas assets. The price is $2 billion, or $1.65 billion when the cumulative cash flow in 2019 up until the deal is closed is taken into account (Tshuva said $1.5 billion today). Ithaca raised $500 million last week for the deal in an issue of bonds bearing 9.375% annual interest.
"This is an important deal, the next stage of which will be reducing Delek Group's leverage," Delek Group CEO Asi Bartfeld said today. "We have been working in this direction for the past year, and we will continue reducing the leverage in the coming years. Following all the expenses, Ithaca will have $1.1 billion in free cash left over in the next three years, and this money is designated for reducing Delek Group's debt. It is important to note that this is a liquid deal that generates cash flow. These are working reservoirs that are producing oil"
Concerning a sale of Delek Group's holdings in insurance company The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5), Bartfeld remarked, "The Phoenix deal should net the group NIS 1.3 billion, net of liabilities. Other than that, we also have over NIS 7 billion in marketable assets, which gives us a lot of freedom.
"According to all of the indications that we have, the Phoenix deal will be completed in the coming months. We also have other liquid assets that it will be very easy to sell. The company has NIS 1.3 billion in cash, and we also have lines of credit. We have to finish selling the remaining holdings in the Tamar natural gas reservoir by 2020, and this will obviously give us a lot more money. So we have great force in both our degrees of freedom and the flexibility of the group's operations." In answer to a question about the possibility that the regulator will not approve the Chevron deal, Tshuva and Bartfeld explained, "There is no reason why the deal should not go through. We have very good indications that the deal will be approved."
Published by Globes, Israel business news - en.globes.co.il - on July 24, 2019
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