First surprise: Israeli gas reserve Leviathan is, as is well known, the biggest deep-water gas discovery in the past decade. Then again, maybe it isn't. Over the Jewish New Year, Leviathan lost the title to a new reserve, discovered on the other side of the world. The reserve is about 100 kilometers east of the Falkland Islands, in a license area known as Loligo. The amount of gas and oil in the reserve has not yet been announced, but, according to preliminary estimates, made before drilling commenced, it could hold 25 TCF (trillion cubic feet) of natural gas, which compares with just 17-20 TCF for Leviathan.
The discovery of a new gas reserve of this order of size in Israeli waters would presumably have sent the Tel Aviv Stock Exchange into hysteria. Take for example the Ratio partnership, which holds 15% of Leviathan. This small partnership, which has practically no other assets besides the Leviathan license, has a market cap on the stock exchange of about NIS 2 billion. This market cap expresses investors' expectations of sales of gas to the domestic market and of exports to countries in the Far East and Europe. What should be the value of a company that holds 75% of a reserve 50% bigger than Leviathan? You can only guess.
Luckily, Falkland Oil and Gas (FOGL) holds exactly those rights in the new super reserve Loligo. As if that were not enough, this anonymous company holds rights in a group of Northern Area licenses (40%) and Southern Area licenses (52.5%) in Falklands waters that have not yet been explored. The next drilling, which will take place in the northern licenses, is meant to discover an oil target that could contain 1 billion barrels.
This is where the second surprise comes in. Falkland Oil and Gas is traded on London's AIM exchange at a market cap of £220 million, which is just $350 million, or NIS 1.4 billion. This valuation also includes a handsome cash balance. In the company's financial report for the first half of 2012, it estimates that at the end of its current drilling campaign, it will be left with cash of not less than $200 million.
It is interesting to note that the company's share price has actually fallen since the first announcement of the discovery. This is because investors had expected the discovery of a 4.7 billion-barrel oil reserve, and were disappointed to hear of the gas that had been discovered instead of the black gold.
Now comes the third surprise: it turns out that the potential of the Falklands licenses has been spotted by on-the-ball gas exploration companies. On August 6, Falkland Oil and Gas announced that it had agreed to sell 35% of the rights in its licenses (except for Loligo and Nimrod-Garrodia) to none other than Noble Energy, the US partner in all the Israeli gas reserves.
Another partner well-known in Israel that was quick to take a share of all the licenses of Falkland Oil and Gas was Italy's Edison, which holds 12.5-25% of the licenses. Edison has also expressed in entering the Israeli market, and it is a partner with Delek Group Ltd. (TASE: DLEKG) in bidding for licenses in Cyprus.
The Falkland Islands are remembered for the war over control of them between Britain and Argentina in 1982. Uncertainty still hovers over the islands in the South Atlantic, and this presumably affects the pricing of the risks in the gas discoveries industry. Other risk factors are the distance from target markets for natural gas, and the stormy ocean that makes operation of floating production and liquefaction installations difficult. But still, even taking all this into account, the Israeli Leviathan gas reserve seems expensive in comparison with its distant Falklands counterpart. That too, however, is relative. Two months ago, we reported on the rights held by Cove Energy in gas results offshore from Mozambique, sold at a price several times higher than the market's valuation of Leviathan. It turns out that pricing of gas reserves is mainly a matter of geography.
Published by Globes [online], Israel business news - www.globes-online.com - on September 27, 2012
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