Delek Drilling LP (TASE: DEDR.L) today published its financial statements. The partnership announced on the occasion that it was considering expanding production capacity at the Leviathan natural gas reservoir. The Leviathan partners have allocated $25 million for engineering tests to examine the gas flow. Delek Drilling has invested $2 billion to date in developing Leviathan, including $700 million in 2019 so far.
Under the original plan, production capacity will be 12 BCM in the first stage of development and 9 BCM in the second stage: a total capacity of 21 BCM. The Leviathan partners will try to increase production capacity in the first stage to 16 BCM a year by adding production wells and a third pipeline from the field to the Leviathan platform. In the second stage, the partners will try to increase production capacity to 24 BCM.
Senior Leumi Capital Markets energy analyst Ella Fried said, "If we assume full exports to Egypt, then it really is necessary to increase capacity. Due to the modular structure of Leviathan, the possibility of increasing capacity to 16 BCM or directly to 24 BCM is being considered. Nothing has been done yet in this direction except for allocating $25 million for economic and engineering tests of the expansion and its costs."
"Delek's estimates for local demand are still optimistic, and the sales forecast for Leviathan in 2020 is 11 BCM, a very high level for the first year," Fried adds. "Assuming 7 BCM in exports, demand may not reach 11 BCM, but it will reach at least 9 BCM, which is also higher than most of the models in the market. As for exports to Jordan, the only risk is geopolitical; everything is going as planned. With respect to Egypt, the question arises of the potential of the local discoveries there. Even if a dramatic quantity of gas is discovered, it will not be ready to start flowing within a year. Furthermore, even if the Egyptian discoveries pose some kind of threat, it is only in the medium and long term, and there have to be very dramatic discoveries and/or development volumes in order to threaten Israeli gas exports."
It was reported last week that Delek Drilling was considering holding an offering for Leviathan on the London Stock Exchange and transferring the holdings that are not Tamar to a new subsidiary, to be listed on the London Stock Exchange main market. The partnership also said that it would consider the option of having the new company dual-listed in Israel.
Fried wrote, "Delek Drilling's announcement reflects creativity in an attempt to overcome the marketability challenges of energy assets in Israel, even when the partnerships are registering achievements in the difficult regional geopolitical situation. In addition, in order to attract foreign financial investors to the local reservoirs, it is necessary to keep a distance from the partnerships' structure and to also give high priority to getting the assets on the overseas oil and gas indices. The partnership cannot be turned into a company now because of legislative restrictions. The only way available to Delek Group Ltd. (TASE: DLEKG) of selling holdings and increasing value is going overseas. If the plan goes through, it will in effect leave Delek Drilling only the balance of its holdings in Tamar and Tamar Petroleum.
"The plan is very elaborate, and is definitely likely to add value to the Leviathan reservoir. On the other hand, it does not solve, and could even increase, the local economy's exposure to the Tamar reservoir," Fried continued. "This can, of course, be solved through a commitment to dual listing. This is an excellent step for Delek, which is likely to benefit Ratio's investors and prove burdensome to investors in Isramco, Tamar Petroleum, and Alon Gas, all of which have pure exposure to Tamar."
Published by Globes, Israel business news - en.globes.co.il - on March 24, 2019
© Copyright of Globes Publisher Itonut (1983) Ltd. 2019