Psagot: Gas stocks sell-off overdone

Leviathan gas rig
Leviathan gas rig

Psagot analyst Noam Pinko finds that even on reduced  demand assumptions, Isramco, Ratio and Delek Drilling are substantially undervalued.

Natural gas stocks on the Tel Aviv Stock Exchange continued to lose altitude today, as oil prices decline worldwide. Participation units in Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L),for example, are down 1.7%, making it a 15% decline so far this year, while Delek Drilling's share price is down 1.4% today, and 13% for the year to date.

"The recent falls in natural gas shares and participation units traded on the Tel Aviv Stock Exchange are overdone," Psagot analysts write in a review released today. Psagot points out two main reasons for the declines: fears of further price falls in the gas industry beyond earlier expectations; and the talk in Israel and globally on expanded use of renewable energy sources.

On the fears of price drops, Psagot says that the expectation was that Energean, which operates the Karish and Tanin reservoirs, and which began selling at lower prices, would in time raise its prices towards those of Tamar and Leviathan. "At present, it looks as though the market expects the opposite, and stronger competition between the three reservoirs over new contracts as well as Israel Electric Corporation being able to procure gas other than in a 'take or pay' format," Psagot says.

Psagot analyst Noam Pinko writes: "The price of gas as derived from the market price of Isramco participation units is $3.7 per Btu, which is lower than even the most conservative estimates." This is mainly because in the absence of new reservoirs, less aggressive competition can be expected between the three reservoirs (Tamar, Leviathan, and Karish) as we get closer to 2025, when total demand in the Israeli economy is expected to reach some 18 billion BCM, after the closure of the coal-driven power plants, and export contracts are expected to reach 10 BCM. After 2025, according to Pinko, demand will be more or less in equilibrium with supply from the three reservoirs.

As far as the second reason is concerned, Psagot says that the more intense discourse about renewable energy evident in a flow of money into renewable energy stocks and high p/e ratios for those companies, compared with substantially lower p/e ratios for fossil fuel companies. "In real terms, this means that use of renewable energy is expected to grow in the future at the expense of gas."

Nevertheless, assuming that Israel's power industry uses renewable sources for about 20% of total power production in 2030, use of natural gas will still double from 11 BCM in 2019 to 22 BCM in 2030.

"We are now factoring into our model lower selling prices in Israel than we previously estimated, and also assuming a lower rate of growth in demand for gas in the local market, and even a decline in demand in the long term," Pinko writes.

Even on these assumptions, Pinko sees the recent declines in the gas sector as overdone, and sets price targets of NIS 0.67 for Isramco (31% above the current stock market price of its participation units), NIS 10.80 for Delek Drilling (42% above market), and NIS 3.10 for the participation units of Ratio Oil Exploration (1992) LP (TASE:RATI.L) (38% above market).

Published by Globes, Israel business news - en.globes.co.il - on January 27, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Leviathan gas rig
Leviathan gas rig
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