The announcement by US energy giant Chevron that it would buy Noble Energy has enthused the Israeli capital market over the past three days. Chevron will not directly affect the profits of the Israeli gas and oil companies in the near future, but its decision to acquire Noble Energy strengthens the standing of the Leviathan gas reservoir, and may make it easier for the Israeli companies to recycle debt they took on in order to develop the reservoir.
Noble Energy holds 39.66% of Leviathan, and it is also the company that operates the gas drilling platform in the reservoir. Noble Energy has two Israeli partners in the ownership of the Leviathan rights: Delek Drilling (45.24%) and Ratio Oil and Gas (15%). At the end of 2019, gas started to flow from the reservoir to Israel, Jordan and Egypt, and the way was thus opened for Delek Drilling and Ratio to recycle the huge debt that financed their investment in developing the reservoir.
Ratio reported two months ago that it had reached non-binding understandings with several potential sources of finance on a loan framework of $600-650 million for seven years, secured by a lien on its rights in the Leviathan reservoir. This will enable Ratio to refinance an existing loan of $450 million, while the rest of the framework will be available for drawdown for any purpose, including further investment in developing Leviathan and repayment of bond debt issued to the Israeli public.
Ratio recently estimated that an agreement with the financing bodies in question would be signed in the third quarter of this year. It could be that the fact that no agreement has yet been signed has been weighing on Ratio's participation units up to now. On Sunday, their price was 67% down for the year to date.
Since Chevron and Noble Energy announced their deal, the participation unit price has shot up 46%, cutting the year-to-date decline to 51%.
This sharp jump can be explained as a kind of excuse or stimulus for investors to flock back to the participation units of the oil and gas exploration partnerships, after the flight from them in the first half of 2020 in the wake of the coronavirus outbreak. At any rate, the advent of so substantial a partner as Chevron in the Leviathan reservoir will have a positive effect on the ability of the Israeli partners in the reservoir to raise debt, thanks to increased confidence in it and the ability to develop it.
Delek Drilling faces a big challenge in recycling a $2.16 billion bank loan ($2.05 billion principal plus interest). Delek Drilling recently reported that it had approached international credit rating agencies concerning the rating it might receive if it recycles the bank debt via an overseas bond offering secured on its Leviathan holding.
Delek Drilling seeks to raise $2.05-2.5 billion through a bank loan, a bond offering, or a combination of the two. It says that the indicative rating it has received for a possible offering is in the international rating group BB.
Acquisition seen as exploiting an opportunity
Chevron Corporation (NYSE: CVX), the second largest energy company in the US, had a market cap at yesterday's close of $171 billion, after losing about 29% of its value since the beginning of the year as a result of the coronavirus pandemic and the consequent drop in energy demand. This is more moderate than the decline recorded by Exxon Mobil Corporation (NYSE: XOM), the largest energy company in the US, which closed yesterday with a market cap of $189 billion, after falling about 38% since the beginning of the year.
The acquisition of Noble Energy for just $5 billion in a share deal is perceived by the local market as the exploitation of an opportunity following a fall of about 60% in Noble Energy's share price since the beginning of the year. Noble Energy is a highly leveraged company, with debt amounting to some $8 billion, such that the valuation of its activity in the deal is about $13 billion.
This valuation is to a large extent reliant on the Leviathan reservoir, recently valued at $10.5 billion in a valuation released by Delek Drilling, a valuation that takes into account the effect on the reservoir's value of the coronavirus pandemic. "Despite the adverse effect on demand caused by the coronavirus crisis, which will have consequences for sales this year and next, Delek Drilling's share in the reservoir is expected to yield net cash flow of $1.15 billion by the end of 2022," the partnership announced recently.
Chevron itself said on Monday that "The acquisition of Noble Energy provides Chevron with low-cost, proved reserves and attractive undeveloped resources that will enhance an already advantaged upstream portfolio. It says that Noble Energy "brings low-capital, cash-generating offshore assets in Israel, strengthening Chevron’s position in the Eastern Mediterranean."
"Chevron wants Leviathan"
Senior sources in the local energy sector say that the steep rises in oil and gas stocks in the past couple of days stem from a change in the atmosphere brought about by Chevron's acquisition of Noble Energy. "The very fact that a company of the order of size of Chevron is coming to Israel enables companies in the industry to feel associated with the top league and to emerge from Mediterranean provincialism.
"For many years, the Israeli industry has complained and whined that major international oil and gas companies like Total and ENI go to Egypt and Cyprus, and even Lebanon, while only a mid-size company like Noble agrees to come to Israel, but now the situation is different. Clearly, a giant company like Chevron, which operates in at least 80 countries, brings with it very considerable added value."
The sources added, "Chevron is a company with a great deal of expertise in drilling and with the ability to leading large development projects, such as the gas pipeline to Europe, or an additional pipeline to Egypt, or a pipeline to Cyprus, or anything else. They do it best, so there's a very significant advantage here. I therefore presume that it will have an effect on the Leviathan reservoir as well. It is faced by the challenges of more and more development, alongside exploitation of the possibilities of exports and sales.
"This deal increases the possibility of accelerating further development of Leviathan, because Chevron has the capabilities, the know-how, and the will. You have to remember that when they looked at Noble Energy, apart from its attractive stock exchange price, Noble Energy's Israel portfolio was a significant asset, perhaps the most important."
If Israel and the Mediterranean had not been of interest to Chevron, the sources say, then it would not have sought to buy Noble Energy in particular, because there are many US-based companies with oil and gas assets in the US itself. Entering the Israeli market and this region in general, the sources conclude, must therefore have been one of Chevron's main considerations in choosing to acquire Noble Energy.
People with whom "Globes" spoke in the energy sector also pointed out that Chevron executives held a conference call with investors the other day in which they mentioned the long-term contracts in our region as a very interesting trigger for the acquisition of Noble Energy. In the US, by contrast, there are no long-term contracts in the oil market.
"Here, they are taking a position that will provide them with a very strong cash flow for a long period. Leviathan has two working contracts, one with Egypt and one with Jordan, and in addition working long-term contracts in the Israeli market," industry sources say. They say that the substantial change in the State of Israel's standing vis-a-vis the Gulf states in recent years contributed to the decision.
"The tension with Iran affects not only Israel, but also neighboring countries like the Gulf states. On the diplomatic plane, Israel has managed to position itself on the side of the good guys. There can be no doubt that this would also have been taken into consideration by a giant company like Chevron. I find it hard to believe that such a deal would have come about had this not been the case."
Leumi Capital Markets analyst Ella Fried published a note in which she said that in her view Chevron would seek to sell the holding in Leviathan after completing the acquisition of Noble Energy, but the sources with whom "Globes" spoke do not think this will happen. "Chevron really does not need to do that; it's not a hedge fund from New York coming to make a quick killing. Apart from that, when a US company buys another company and plans to sell part of its activity straightaway, it will always say so to its investors, and Chevron has said no such thing," they point out.
Published by Globes, Israel business news - en.globes.co.il - on July 22, 2020
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