Givot Olam Oil Exploration LP (TASE:GIVO.L) was the drama of the week in the capital market, because of the well-publicized dispute between its founders. The dispute boiled over last week, when the company notified the Tel Aviv Stock Exchange (TASE) that a pre-dismissal hearing had been called for CEO Tovia Luskin, the driving force at the company.
The announcement was like a bolt out of the blue for the 62-year old Luskin. It was how he learned that his silent partners in the company, diamond merchant Nogah Ben-David and Shmuel Lawrence Becker, with whom he had co-founded the company, had decided after 20 years to become involved in its management.
The response from the man who might be depicted as a jolly grandfather, a prominent figure in the field with a white beard, was a sharply-worded letter in which Luskin said, among other things, "The company's success is thanks to my efforts and the hard work I have invested indefatigably, while you have not lifted a finger in managing the company, or even invested any capital in it. Instead, for a long time, you have been busy solely with unnecessary power struggles for personal gain rather than for the good of the company… I regret to say that you lack the understanding, knowledge, and skills to serve as directors of the company."
To understand how Luskin, who was elected as "Man of the Year in Energy" by the Central Energy Committee just a few months ago, has ended up fighting to keep his job as Givot's CEO, it is necessary to go back 20 years into the past, to the early 1990s, when the limited partnership was founded.
Using the Torah to find oil
Tovia Luskin was born in 1951 to a religious family. His father's parents were killed in the Holocaust. Luskin, as a secular Jew, studied mathematics at one of Moscow's prestigious schools. He wanted to study nuclear physics at university, but was rejected because he was Jewish. He therefore signed up for geophysics, which he did not enjoy. After a year, he applied to emigrate to Israel, but his father made the move conditional on completing his studies. After graduating as a geologist, he chose to emigrate to Canada, which has a large energy industry. He worked for several companies, before joining Bridge Energy Ltd. in Australia, where he resided for seven years.
Bridge Energy's media advisor was a Chabad rabbi, who encouraged Luskin to return to religion. At the same time, he began analyzing Israel's oil potential with the help of Bible. He is now haredi (ultra-orthodox), has six children, and lives in Jerusalem.
The exploration partnership's name, Givot Olam, and the name of the exploration license at Rosh Ha'Ayin, Meged, are derived from the Torah. In the last weekly Torah portion in Deuteronomy, Moses blesses the Tribe of Joseph for its land. One of the portion's verses states, "For the peaks of the ancient mountains and for the precious things of the everlasting hills". Rashi interprets "ancient mountains" to mean the mountains that were created before other mountains, which Luskin interpreted to mean a place where an oil trap might be found.
Luskin arrived in Israel in 1990, after stopping in New York to obtain the blessing of the Lubavitcher Rebbe for his oil exploration plan. With the help of Russian experts who had immigrated to Israel, he began mapping the country. He concluded that oil and gas fields could be found in parts of the Sharon. Luskin initially financed his company from his savings, but they ran out after three years.
Then the hoped-for event happened. In 1993, Luskin linked up with haredi businessman Nogah Ben-David, the owner of the Gold of Jerusalem jewelry store (a longstanding family business that traded in pearls for many years) in the city's Givat Shaul neighborhood, and together with Ben-David's son-in-law, Shmuel Becker, they founded the partnership.
Helpless before investors
Over the next 20 years, under Luskin's charismatic leadership, Givot Olam repeatedly raised capital from the public, for a total of NIS 300 million. Commenting on the role of his partners in an interview 11 years ago, Luskin said, "Ben-David and Becker are still partners in the company, but their involvement is limited."
At that time, Givot Olam was drilling the Meged 4 well. The company notified the TASE that there "were signs of oil" (the same as at the company's two previous wells), but ultimately nothing was found. The next well, the company's fourth, the Meged 5 well, which Givot Olam began drilling in 2009, was a whole other story.
Although in this case too, Givot Olam's first report mentioned "signs of oil", but it subsequently turned out that, this time, it found oil deep in the earth. The price of Givot's participation units skyrocketed (the company's market cap peaked at over NIS 1 billion), as more and more people, many of them haredim, became shareholders.
Luskin, who was seen as a Messiah by some of Givot Olam LP's investors, did not conceal his pride at the discovery and he even fanned the enthusiasm. "Meged 5 is like the granting of the Torah for us," he said at a mass meeting the company organized at Jerusalem's Binanyei Ha'Ooma Convention Center in March 2010, attended by 700 participants, after he was greeted with thunderous applause. At the time, Givot Olam was providing very optimistic data about the field's potential oil reserves, getting it into trouble with the Israel Securities Authority, which suspended trading in Givot Olam's partnership units until it published clarifications.
Ultimately, after much effort and overcoming operational challenges, Givot achieved stable oil production at Meged 5 in 2011. To date, the well has generated over $45 million in sales of oil, making the company a very important oil producer by Israeli standards.
But just when it seemed that the key for drawing oil from the ground had been found, cracks emerged in the investors' blind faith in Luskin, and as things have now turned out, in the faith of his partners too. The subsequent development plan for the Meged field included the drilling of three more wells, while Givot had the wherewithal to finance just one.
Givot Olam sought to raise more capital from its investors, but Luskin suffered a bitter disappointment. For the first time, the company's partners faced a united front of investors, who had seen their investment lose more than half its value from its peak. Not only did the investors oppose the raising of capital, they also opposed the large 20% royalties from the oil sales paid to the partnership's general partner and Luskin's request for a salary of NIS 150,000 a month.
Luskin found himself helpless before investors who had worshipped him just three years earlier, and they were not the only ones to have lost their faith in him. His longstanding partners had also become dissatisfied with his domineering style, and felt that at Givot Olam's current stage, he was causing more harm than good as CEO.
It is important to remember that Givot Olam's founders are not young men, but are now in their 60s and 70s. Nonetheless, after more than 20 years in business, they want to see the big money, but this cannot happen until the company covers the investments by its public shareholders, which total NIS 300 million.
"If the model is for each well to finance the next one, your grandchildren won't profit from this," said an elderly shareholder at the general meeting that broke down at Kfar Hamaccabiah in August 2013. The directors of Givot Olam LP's general partner (which controls the company) may have finally grasped this point.
Givot's general partner, Givot Olam Ltd. is owned by Har Kedem Petroleum Ltd. (73%), whose main shareholders are the Becker and Ben-David families, and by T-Oil and Gas Ltd. (27%), which is owned by Luskin. The general partner's board of directors comprises Luskin, Becker, Ben-David, and an external director. Moshe Kelner was the external director until 2011, when he resigned.
The key figure in the story is therefore Kelner's successor, an unknown man who recently retired and was appointed as an independent director in Givot more than two years ago. He is Josef Frolich (71), who spent most of his career at Granite Hacarmel Investments Ltd., where he held various financial positions, including CFO. He also served as director and CFO at Granite Hacarmel subsidiaries, fuel company Sonol Israel Ltd. and Supergas Ltd., which gives him experience in the energy business.
Frolich is the tiebreaker on Givot's board of directors, and as the independent director, he does not favor any of the parties. Until now, he supported Luskin, but it seems that, lately, he too began to realize that Luskin was no longer critical for the company, and now that the company has moved beyond the oil exploration stage, his presence is actually a hindrance. He seems to have reached this conclusion, because Luskin was ousted from his life's work last Sunday.
No big money for Givot
The brawl at Givot Olam LP's general partner, Givot Olam Ltd., is a reminder why investment institutions, who control the big money in the Israeli capital market, have almost all avoided the company, even though its dry numbers suggest that it was what investment managers seek. Givot's market cap is NIS 335 million (it used to be higher and the company was included on the Tel Aviv 100 Index until January 2014), and the public owns 95% of its participation units.
This means that the liquidity of Givot's participation units is high and it is possible to buy and sell them without greatly affecting their price. In addition, the company has already passed the high-risk exploration stage, developed a production infrastructure at the Meged 5 well, and has a customer (the Paz Ashdod Refinery) for its oil. The company has therefore had revenue in the past three years and will have fairly stable cash flow in the future.
However, an examination of investment institutions' holdings in Givot shows that they total only a few million shekels. Anyone who has tracked the company's reports and incidents over the years knows perfectly well why.
The veneer cracks
In the past, when Givot's executives wanted to give it a more serious image befitting the owner of a commercial oil discovery, at a time when the market still considered it a speculative investment, they hired IDF Major General (res.) Giora Eiland as an advisor to give the company a legitimate image. The company also reduced its notices to the TASE and even hired an investor relations management firm.
However, in the past six months, as the Meged 6 well was nearing its target depth and the disputes over the continued development of the oil field and how to finance it came to the surface, everything that Givot tried to build with so much hard work over the years was utterly wrecked.
First, the general meeting fell apart, when the blatant conflicts of interest between the limited partnership (the public) and the general partner (the developers) at Givot were openly expressed. Subsequently, Givot Olam LP failed to raise a small amount of capital from the public. The dispute peaked in early February in the bitter battle between the partners. The directors' summons of Luskin for a pre-dismissal hearing and his contemptuous response exposed behavior that is unbecoming to a serious public company. The dispute culminated with Luskin's ouster.
When investment managers see the conduct of Givot's board of directors, it is easy to see why they are in no hurry to invest in it. In the wake of Luskin's ouster and his temporary replacement by Eiland, the company's path to recovery and the creation of confidence in the capital market seems as far away as ever, and may prevent Givot from ever reaching a worthwhile value.
Speculators' money can sometimes boost a security to an irrational value, but when the rally is over, the money is withdrawn just as quickly as it was invested. Institutions' money, which is invested for the long haul and stabilizes a company, was never invested in Givot, so it was never able to make the jump to the next league made by other exploration partnerships like Tamar partner Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) and Leviathan partner Ratio Oil Exploration (1992) LP (TASE:RATI.L). They too were once synonymous with speculation, but now that they own commercial natural gas discoveries, they have become legitimate investments in investment portfolios.
Published by Globes [online], Israel business news - www.globes-online.com - on February 20, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2014