Kobi Yeshayahou
Leumi Capital Markets has downgraded Avner, Delek Drilling, and Isramco, but upgraded Ratio.
Leumi Capital Markets has downgraded its recommendations for Avner Oil and Gas LP (TASE: AVNR.L), Delek Drilling Limited Partnership (TASE: DEDR.L), and Isramco Negev 2 LP (TASE: ISRA.L). Leumi Capital Markets senior gas and energy analyst Ella Fried has lowered her recommendation for these three partnerships from "market outperform" to "market perform," while upgrading her recommendation for Ratio Oil Exploration (1992) LP (TASE:RATI.L) from "market perform" to "market outperform."
In her review, Fried notes that the main reason for the change is "the lower likelihood that we are assigning at this stage to an extra 25% in exports during the initial phase of development in the Leviathan natural gas reservoir and a two-year delay in the second stage in our working assumptions."
Fried adds that the lowering of her recommendations for Isramco and the Delek Group partnership "was affected by concern about some cannibalization in the Tamar reservoir estimates in the short term." Fried lowered her target price for Isramco partnership units from NIS 0.78 to NIS 0.70 (despite a possible change in the partnership's capital structure), while retaining her NIS 14.20 and NIS 2.60 target prices for Delek Group subsidiaries Delek Drilling and Avner, respectively. Even after the downgrade, the target prices are still higher than the market prices: 10% higher for Isramco, 8% for Avner, and 13% for Delek Drilling.
On the other hand, Leumi Capital Markets is raising its target price for the Ratio share by 12% to NIS 3.20, 21% higher than the market price, despite its high risk profile. "We are doing this mainly due to the fact that the partnership's main asset is on the verge of publishing a final investment decision for the Leviathan reservoir. We believe that the point of no return has been reached with a leading international syndicate, with an investment of over $800 million, including exploration," Fried writes.
Avner and Delek Drilling responded today to the recommendation with falls of 1% and 1.5% on the TASE, respectively, while Isramco remained unchanged and Ratio was down slightly.
Production from Leviathan will not begin before 2020
According to Fried, the global oil and gas sector will see the beginning of a slow and gradual diversion of the premium granted in the pricing of existing and already producing reservoirs in which most of the investment has already been made, in comparison with reservoirs that are being developed. "That is the reason why we are recommending "Market outperform" for Ratio, despite its high risk profile. The other units in the sector continue to constitute an opportunity in the middle and long term, but without short-term triggers," Fried writes.
The projected cash flow for the Tamar reservoir (excluding exports) reflects a value of $11.5 billion for the reservoir (at a fixed price of $5.44 per mmbtu of natural gas), net of super royalties paid to the state, and before royalties to third parties.
Fried assumes that 60-65% of the 21.9 TCF in the Leviathan reservoir will be channeled for exports, although production in the reservoir will not begin before 2020 "due to the challenging business environment." Development costs for Leviathan are estimated at $5.75 billion, according to the projected cash flow published by the companies (the capitalization rate is 10.5% for the initial development stage and 14% for the second stage). Leumi Capital Markets estimates the reservoir's annual operating expenses at $200 million.
Published by Globes [online], Israel Business News - on January 30, 2017
© Copyright of Globes Publisher Itonut (1983) Ltd. 2017
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