Excellence Brokerage senior analyst Gilad Alper today sent to the investment house's clients an update of his coverage of shares in the partners in Leviathan. In his opinion, the deal with Woodside Petroleum Ltd. (ASX: WPL), which the media reports will be closed this week, is good news for obvious reasons, because it could finally get the huge process of investment in developing the Leviathan natural gas field going and will improve certainty about the project.
Noble Energy Inc. (NYSE: NBL) owns 39.66% of Leviathan, Delek Group Ltd. (TASE: DLEKG) units Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L) each own 22.67% and Ratio Oil Exploration (1992) LP (TASE:RATI.L) owns 15%.
"In our opinion, the importance that the market gives the valuation at which the deal will be closed is exaggerated," says Alper. "Obviously, the higher the valuation compared with the initial deal signed in early 2013, the higher the investors' security will be, optimism will rise, and sentiment will be more positive. But it should be remembered that this is a deal that will almost certainly include a very substantial option component, and this option will depend on the form of gas exports."
In other words, the deciding factor for Leviathan's value is whether gas will be sold to Turkey via pipeline, or sold as liquefied natural gas (LNG) to the Far East. "Putting the possibility of a high price that will grab newspaper headlines is positive, but is not the determining factor," says Alper.
"Estimating the value of Leviathan is complicated, because of the extreme uncertainty about sale prices, the capitalization rate, the necessary investment, the time frame, and political, tax, unstable and aggressive regulation, and other risk factors. However, it can be said with some confidence that to justify an upside for the partners in Leviathan, the Turkish option must be exercised."
Alper says that liquefaction and the sale of gas to the Far East requires too great an investment. "It is of course very profitable, but at current prices, this option cannot give a further upside to the shares' prices. That being the case, what are the chances of the Turkish option? In our opinion, an economic/political crisis in Turkey reduces the chances of this possibility being realized. It is difficult for us to believe that a Muslim country in crisis will sign such a large deal with Israel. It's possible, but it goes against history and experience. The conclusion: the Woodside deal is positive, but the deciding factor is Turkey, and the situation in Turkey requires caution."
Published by Globes [online], Israel business news - www.globes-online.com - on February 3, 2014
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