Two years after a major crisis that threatened its stability, Delek Group, controlled by Yitzhak Tshuva, is heading towards completing another important move to improve its liquidity: the IPO of subsidiary Ithaca Energy, which engages in oil and gas exploration and production in the North Sea.
The offering is expected to be at a valuation in the billions of dollars, and to generate high capital gains for Delek Group, but chiefly it will improve its liquidity. Leading the move is Ithaca's executive chairman Gilad Myerson, who recently came to Israel from London to present investment institutions with the company's story and the huge transformation it has undergone over the past three years.
In an exclusive interview with "Globes", Myerson explains that Ithaca today is a strong and very significant company in the UK, and one of the largest producers of oil and gas on the British side of the North Sea, in the area between Scotland and Norway. "It wasn’t like that three years ago," he emphasizes, "We were a very small company then.
"Ithaca currently produces about 85,000 barrels of oil per day, generated $1.3 billion in EBITDA over the past 12 months, and generates of the order of $5 million cash per day," he said. Moreover, as a major supplier of oil and gas to the UK, Ithaca has become important to that country's energy security.
"I was summoned by the British prime minister, to talk to him about energy security, and to meet the minister of industry and trade as well. The industry in general, and Ithaca in particular, have become important this year for energy security in the UK," says Myerson.
The Chevron deal: Quadrupling production capacity
Ithaca's story takes us back seven years. In 2015, Delek Group invested $66 million to acquire a 20% share of Ithaca Energy, a Canadian drilling company then traded on the London and Toronto exchanges. Less than two years later, Delek completed a full offer to purchase Ithaca shares at an investment of $520 million, becoming its sole shareholder. The next big move was made by Ithaca itself in the summer of 2019, when it acquired Chevron's North Sea operations for $1.75 billion.
The deal was completed in November of that year, and as part of it, Ithaca acquired ten gas and oil producing properties, a transport and storage infrastructure that included pipelines and drilling rigs, as well as the Chevron staff.
Ithaca stated at the time that the deal would expand its daily production capacity fourfold, from 20,000 to 80,000 barrels per day, and also increase the amount of the company's proven reserves by 150% to the equivalent of about 225 million barrels of oil.
Ithaca not only holds oil and gas reserves, but also operates the drilling rigs in those reserves. The acquisition of Chevron's assets was intended to reinforce its position and make it a significant North Sea player.
Alternative energy? "The world hasn't reduced consumption"
A few months after the purchase, however, things changed from one extreme to the other. The Covid-19 pandemic spread around the world, lockdowns and restrictions were imposed in most countries, and the price of North Sea oil (Brent crude) fell to a low of about $20 a barrel - close to the cost of producing it.
Ithaca continued to operate, but the Delek Group, which had invested a considerable amount, ran into a severe crisis. Delek made write-offs on its investment in Ithaca, sold assets, and raised capital from the controlling shareholder and the investing public, all in order to retain its two main investments - Ithaca and NewMed Energy (then called Delek Drilling).
By the end of 2020, the price of Brent had risen back to $50 a barrel, influenced by the first signs of economic recovery and the development of the Covid vaccines. By late June 2021, the price was approaching $80 a barrel, in the wake of a successful worldwide vaccination campaign and a pandemic on the wane. These prices brought back high rates of profitability to the oil and gas industry, and put some color back into shareholders' cheeks.
Since mid-February this year, Brent crude has been trading at more than $100 a barrel, following the Russian invasion of Ukraine, and the boycott of Russian oil in response by the European countries and the US. The British government recently called on gas and oil companies to increase production in existing reservoirs and develop new ones.
For Ithaca, which sells most of the oil and gas it produces to the UK, this is a call to make new investments. Even before that, the company had already made four acquisitions within a year, which will further strengthen its position.
Myerson says that what Ithaca has succeeded in doing over the past year is to build momentum within a sector suffering from huge gaps between supply and demand. "Many companies in the oil and gas industry are now talking about using new technologies and green energy, drafting plans to enter into hydrogen, solar and wind energy production.
"St the same time, they're selling existing gas oil assets. That creates a gap between supply and demand, which drives up oil and gas prices, because there's too little supply. Meanwhile, people around the world haven't reduced their energy consumption.
"So, to imagine that it's possible to simply turn off the oil and gas supply, is just not true. It's unrealistic and irresponsible, because the world can't exist today without energy. We entered this niche, and found ourselves in a market with many sellers and few buyers.
"In the North Sea, for example," explains Myerson, "the world’s largest oil producers, such as Shell, ExxonMobil, Chevron, and BP, have decided they don’t want to focus on this area, so they're selling off good assets. So a situation came about in which many companies made a strategic decision to sell, and we were able to buy assets and expand our production at very attractive prices. "
There has been talk for a long time about an Ithaca IPO on the London Stock Exchange. Where does that stand?
"We're preparing for an IPO. The acquisition of Siccar Point Energy [for $1.1 billion, including debt. - O.C.] gave Ithaca reserves and one of the best R/P ratios [reserves-to-production ratio, the most commonly used estimate of an energy company's lifespan - O.C.] in the sector.
"After this transaction, the far horizon towards which the company’s business is moving can be seen, and it has all the right components for an IPO. Suddenly, Ithaca became a company that was very interesting to the investing public. Leading investment banks have started contacting us, saying this is the right time to go public. All the big names say they can and want to float us. So, we're preparing for an IPO."
What are you waiting for?
"We're holding talks with investors selectively, to obtain feedback and understand what's important for them to see in a company like Ithaca. The feedback so far is very good. By the way, most of the investors we are talking to are under-exposed to the oil and gas industry."
Unfortunately for them.
"Indeed. The only sector that's yielded a positive return this year is the oil and gas industry. I spoke, for example, with representatives of a very large foreign institutional entity from abroad, who a year ago decided they did not want to invest in oil and gas anymore.
"Now, they talked to us about how they want to invest, because they've come to the conclusion that the previous decision was wrong. Oil and gas are needed as part of the world's transition between types of energy, and they want to invest in companies that operate responsibly, and Ithaca is there."
Are there are also opposite examples - institutions in Israel and Europe that are refraining from investing in oil and gas, for fear of negative publicity?
"I think so. There are funds that made strategic decisions not to invest in oil and gas - and I respect them, by the way. Everyone should feel comfortable with what they invest in.
"In the end, we're a small company in one of the biggest industries in the world, so I believe we'll be able to find a group of investors who want to invest in us. We also want to choose investors who will be with us over time; anchor investors, who will understand our story, and get to know our management, and our projects."
"Commodity companies don't grow this way"
Delek Group conducts an annual valuation for Ithaca, carried out by an external appraiser: US-based multinational financial consultancy Duff & Phelps. At the end of 2021, Ithaca was valued at $3.1 billion. In the first quarter of 2022, its value jumped to about $3.7 billion, thanks to the added value generated by the acquisition of Japanese company Marubeni Oil and Gas.
This current valuation is 4.6 times higher than the $813 million valuation by Duff & Phelps at the end of 2018. Moreover, the value at the end of the first quarter still does not include additional acquisitions, especially Siccar Point (which has just closed).
These acquisitions are expected to boost Ithaca's value further. Says Myerson, "This picture demonstrates how very high, genuine value can be produced through understanding the market and the opportunities, understanding the operation and using the different levers."
How do you add value?
"By operating the rigs and facilities better, adding reserves through additional well drilling, using tax synergies, and taking advantage of development opportunities. When you use these levers, then through acquisitions it's possible to generate very high value. The growth we've shown is like a technology company; commodity companies don't grow this way."
"When Putin invaded Ukraine, the whole world discovered what the industry knew"
Besides the price of oil, the hike in the price of natural gas, following the European sanctions on Russia, also served Ithaca well this year. "The intensity of the price increase really surprised us, not the fact that prices rose," says Myerson. "We've been talking for a long time about the imbalance between supply and demand.
"Most people in the industry knew there would be a gas shortage, and they talked about it. How intensely it was reflected in the price of fuel - that was not expected. But the jump in natural gas prices happened even before Putin invaded Ukraine.
"As early as December 2021, gas prices reached 400 pence per thermal unit (MMbtu), which is like selling oil at $320 a barrel. That's a huge price. The cost of production in the big reserves is about $5 a barrel, so the margins were huge. This was an indication of the discrepancy between demand and supply.
"And then in February, Putin invaded Ukraine, and the whole world discovered what the industry knew. Germany suddenly realized it depended on Russia, because 40% of its gas comes from there.
"When we talk about energy security in Europe, it's not that it was a little warmer in the summer and a little colder in the winter. People die when there's no gas. Industries stop. You can't stop gas. Energy security is true security, countries need energy.
"So suddenly, the tune changed very significantly. From a situation in which we talked about the importance of switching to alternative energies, to one in which we check first that there's enough energy to meet our industrial, private, and institutional consumption."
Myerson says the situation has led to regulatory changes. Britain, for example, came up with an energy security strategy that essentially seeks to ensure energy supply to the British population and also increase production, because the UK is currently a net importer of gas and oil.
"The three top leaders in the UK, the prime minister, Johnson, the chancellor of the exchequer, and the secretary of state for business, energy and industrial strategy, have all stressed that the country needs to produce more oil and gas in the North Sea. This is a 180-degree shift," Myerson emphasizes.
"If we were to have had this conversation in September 2021, people would have spoken differently ahead of the UN Conference on Climate Change, which was held in Glasgow in November of that year. Now everyone there is talking about the need for energy security. "
From the Air Force to Asda: "Until I moved to London, I was an outstanding reservist"
Gilad Myerson joined Ithaca in 2019, first as CFO and later as interim CEO until a replacement was found for former CEO Bill Dunnett, who died of cancer in September 2021.
"I believe a CEO of an energy company should be someone from that sector, a petroleum engineer or a geologist. So, I came in temporarily until we brought Alan Bruce from ConocoPhillips, who is both an engineer and one of the industry's great talents," says Myerson.
Myerson currently serves as executive chairman of Ithaca and the Delek Group representative for North Sea oil and gas. Before joining Ithaca, Myerson served from 2018-2019 as COO of pharmaceutical company Theramex, then controlled by the CVC investment fund.
Theramex was a new company, based on a number of women's health products and drugs, which CVC acquired in early 2018 from Israeli company Teva. About three months ago, CVC announced the sale of Theramex to investment firms PAI Partners and Carlyle, in a deal that yielded a threefold return on investment within about four years.
Before that, Myerson worked for 12 years at international consulting firm McKinsey, where he managed, among other things, private equity operations in Europe, the Middle East and Africa. For the past 12 years he has lived with his family in London, but claims that he will return to Israel in the future.
For his army service, he enlisted in a pilot's course, and trained as a combat helicopter pilot. After completing the course, he was stationed with 160 Squadron of the Israeli Air Force (also known as The First Cobra) where he served in the standing army, and later in the reserves. "Until my move to London, I was an outstanding and very active reservist, with 90-100 days of duty a year, while also working at McKinsey," he says.
Published by Globes, Israel business news - en.globes.co.il - on July 3, 2022.
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