Harel Finance analyst Elad Kraus today cut his recommendation for the oil and gas exploration sector from "Overweight" to "Market weight", due to the latest rise in prices of shares and the closing of the discount.
"We estimate that the sector's positive point in the near term will be the entry of a partner into Leviathan. However, approval of the Tzemach Committee recommendations is liable to be delayed, and the recommendations could even changed for the worse, following the failure of the latest wells, which reduce the domestic supply of gas," says Kraus.
Kraus's stock pick in the gas sector is Delek Group Ltd. (TASE: DLEKG). He cites the company's relatively high discount compared with the sector, taking into account the leverage level of the company, which has a solo level of 52%.
Kraus gives Delek Group subsidiaries Avner Oil and Gas LP (TASE: AVNR.L) a target price of NIS 2.28 and Delek Drilling LP (TASE: DEDR.L) a target price of NIS 13. He gives their Tamar partner Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) a target price of NIS 0.54, and their Leviathan partner Ratio Oil Exploration (1992) LP (TASE:RATI.L) a target price of NIS 0.35. He gives Delek Group a target price of NIS 919, compared with its market price of NIS 710, a discount of 29%. Delek Group is the only company with an "Outperform" recommendation; all the other companies have a "Market perform" recommendation.
Kraus notes the presentation made by Noble Energy Inc. (NYSE: NBL) last week, which gave new figures for the potential oil reserves at Leviathan: a 25% geologic probability of success and an average of 1.34 million barrels of oil equivalent.
Kraus says that the geologic probability of success of finding oil in the upper target strata was raised to 25% from 15%, but that the revision is not supported by the Netherland Sewell & Associates Ltd. (NSAI) report, and is probably based on Noble Energy's assessment of that report. He adds, "The higher probability of finding gas/oil, as well as the setting of a clear timetable, are a signal for the entry of an investor, which according to reports by the Israeli partners, will be about 30% of Leviathan, making it the largest shareholder."
As for Tamar, Kraus says, "Pictures of the production platform have been published, giving a look at the power of this facility. If the gas begins to flow in April 2013, the operating risk level will fall, bringing down the capitalization ratio. As a result, the reservoir's value will rise."
As for the Tzemach Committee, Kraus says, "The Tzemach Committee was very favorable for the gas partnerships, especially with regard to the fact that gas exports by liquefaction could be on the basis of a facility that will be built in Cyprus. Although there is preference for building a facility in Israel, it is not mandatory."
Kraus concludes, "The value of Tamar and Leviathan can be derived from the market value of Isramco and Ratio. On the basis of this analysis, there is a premium which did not exist before in the shares of Avner and Delek Drilling. The significance of this premium is that there is a commercial preference for holding shares in Isramco and Ratio over Avner and Delek Drilling."
Published by Globes [online], Israel business news - www.globes-online.com - on October 16, 2012
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