Delek Q2 profit up as Leviathan gas set to flow

Yitzhak Tshuva

The cost of the hedging deals by Delek and Ithaca for revenue from the sale of oil and gas in the next three years, after the deal for acquiring Chevron's assets is finalized, is $173 million.

Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva, today published its financial report for the second quarter of 2019. Delek's second quarter net profit totaled NIS 190 million, 12% more than in the corresponding quarter last year.

Delek has three main activities: natural gas production in Israel from the Tamar and Leviathan reservoirs, sales of fuel and other products through a chain of filling stations and convenience stores in Israel, and international oil production and sales through its Ithaca subsidiary, which conducts oil exploration and production in the North Sea.

Ithaca contributed NIS 27 million to Delek's second quarter net profit, compared with a NIS 23 million loss in the second quarter last year. Fuel activity in Israel contributed NIS 39 million, 44% more than in the second quarter of 2018, while sales of natural gas in Israel totaled NIS 58 million, 45% less than in the corresponding quarter in 2018. Profit from other activities amounted to NIS 124 million in the second quarter, up from NIS 101 million in the second quarter of 2018.

Delek's revenue totaled NIS 2.l billion, 1.4% more than in the corresponding quarter last year. Revenue from fuel activity in Israel was up 4.2% to NIS 1.3 billion, while Ithaca's revenue was NIS 350 million. Revenue from the Tamar reservoir declined 14% to NIS 304 million.

Delek finished the first half of 2019 with NIS 4.1 billion in revenue, 6% higher than in the first half of 2018. Revenue from Ithaca jumped 43% to NIS 743 million.

According to Delek's reports, development of the Leviathan reservoir is progressing on schedule, with 90% of the development work having been completed. The flow of gas from the reservoir is slated to begin this year. Work on the legs of the platform off the Israeli coast has been completed, and the upper part of the platform is on its way to Israel, and is scheduled to arrive in the next two weeks.

Negotiations for adding a partner in the Chevron deal

With all due respect to Delek's financial report, however, what interests the company's investors is mainly completion of the $1.6 billion deal for acquiring the North Sea assets of Chevron announced by Delek at the end of May. Since the announcement of the deal, which is supposed to be closed within three months, Delek's share price has plunged 21% due to concern among investors about the high leverage and costs in the deal. Efforts to soothe these concerns by Tshuva and Delek CEO Asi Bartfeld, who have since conducted a conference call with analysts and investors, have not had much success.

Delek reiterated today that completion of the deal would substantially bolster Ithaca's daily production capacity from an average of 20,000 barrels a day to over 80,000 barrels a day, a 300% increase, and would increase its proven reserves to 225 million barrels, with potential for 45 million more barrels of reserves. Ithaca will be the operator for four of the 10 assets acquired.

Delek added, "Since Ithaca has a $2.2 billion tax asset, which it will exploit against the strong cash flow from the acquired reservoirs, Ithaca and Delek Group have already conducted hedging deals for the prices of 32 million barrels of oil (30% of the total) until December 2022 at an average price of $65 per barrel."

As of now, the cost of the hedging deals by Delek and Ithaca for revenue from the sale of oil and gas in the next three years (after the deal for acquiring Chevron's assets is finalized), is $173 million.

Delek and Ithaca are currently negotiating to bring a $300 million partner into the Chevron deal, among other things through an allocation of preferred shares in Ithaca. The company is also negotiating a $150 million oil marketing agreement for the coming years.

Bartfeld said, "In the upcoming months in 2019, we foresee the successful completion of a number of important measures that we began in the first half of the year. These measures are designed to continue strengthening the group's capital and boost its regular cash flow in the coming years. Completion of the deal for the sale of the shares in Phoenix for NIS 1.64 billion will make Ithaca and Delek Group a player in the international energy market, facilitate an IPO by Ithaca, and generate a substantial free cash flow for Ithaca that can be distributed."

Published by Globes, Israel business news - en.globes.co.il - on August 29, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Yitzhak Tshuva
Yitzhak Tshuva
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