Delek Group Ltd. (OTCPK:DGRLY) Q3 2016 Earnings Conference Call November 29, 2016 9:30 AM ET
Dina Vince - Head, IR
Gabi Last - Chairman
Asi Bartfeld - President and CEO
Barak Mashraki - CFO
Tavy Rosner - Barclays
Rafal Gutaj - Bank of America Merrill Lynch
Ladies and gentlemen, thank you for standing by. Welcome to the Delek Group Results Conference Call. If you have not yet received a copy of the financial results, please find them on the Company’s website at www.delek-group.com.
Before we start, I would like to refer you to the Company’s Safe Harbor statement. Some of the information that we are providing during this conference call may include forward-looking statements. There are various important factors that may cause the Company’s actual results to differ significantly from those set forth in the forward-looking statements.
This conference call does not replace the need to review the Company’s periodic and quarterly reports which include the full information about the Company, including information that is considered forward-looking statements.
All participants are present in listen-only mode. Following management’s formal presentations, instructions will be given for the question-and-answer session.
I would now call over the call to Ms. Dina Vince, Delek's Group Head of Investor Relations. Ms. Vince, please go ahead.
Thank you, Operator. I would like to welcome all of you to Delek Group’s conference call to review our third quarter 2016 results. With me on the line today are Delek's Group management, including Mr. Gabi Last, Chairman; Mr. Asi Bartfeld, President and CEO; and Mr. Barak Mashraki, CFO.
Following the summary of the results, we will all be available to answer any questions. An English translation of the results is available on our website. I will now only provide a brief summary.
In terms of some of our highlights, our third quarter net income grew substantially to NIS85 million almost four times compared to NIS22 million last year. This was in part due to a record quarter of production of Tamar at approximately 2.6 BCM with peak production reaching around 1.0 Bcf a day. We declared a dividend of NIS200 million to shareholders for the third quarter. From a strategic standpoint, our strong balance sheet has enabled us to expand internationally in line with our strategy and we recently won a new international license in Newfoundland, Canada.
With prospects expanded internationally signing an agreement to buy participation units in Ratio Petroleum Energy an international E&P company, which drives in Guyana, Malta, Ireland and the Philippines. We reached agreements with two banks in the financing of Leviathan's development with a limited recourse loan of up to $1.75 billion. This represents strong progress towards sanctioning the Leviathan project and reaching the Financial Investment Decision.
We signed an important milestone agreement with Jordan's National Electric Power Company for the supply of natural gas from Leviathan as well as an additional agreement with a local off taker. More specifically with regards to the East Mediterranean E&P arm in Tamar production was 2.6 BCM a clear suggest over 1 Bcf a day of natural gas and 126,000 barrels of condensate.
With that also a stable year-on-year growth compared to 2.5 BCM and 117,000 barrels of condensate that we reported in the third quarter of last year. This increase lasts to an improvement now overall Q3 net income from the East Mediterranean E&P sector, which was NIS120 million, up 38% year-over-year compared to NIS87 million in the same period of last year.
On operation side, drilling of the Tamar-8 development and production well began in October as planned. This is the sixth well to serve an increased redundancy in the production system and enabled maximum supply from the Tamar Reservoir during periods of peak demand. I'll remind you that the total budget at 100% is $265 million and it drilling is expected to last for three months in total, as part of the natural gas outline.
With regards to Leviathan, on this call in the previous quarter we discussed the conclusion of six years of challenges that are finally behind us. Today, we're happy to announce further progress and I would like to highlight some of the new milestones we've surmounted. September 26th, marks an important milestone, a $10 billion natural gas supply agreement was signed with Jordan's National Electric Power Company for the supply of the total contracted quantity of 45 BCM of natural gas over 15 years. On November 24th, an additional agreement was signed by Leviathan and the local off-taker, Paz Ashdod Refinery, for the provision of 3.12 BCM of natural gas over 50 years Take-or-Pay was estimated at $700 to older partners.
This is quite an achievement in a short period of time, as you may remember we were unable to start marketing to the local off-takers at the beginning of this year following the approval of natural gas outline in December 2016. We've published Leviathan's discounted cash flow figures related to phase I(NYSE:A), which is the first stage of the Development Plan with annual expected capacity of 12 BCM a year or 1.2 Bcf a day which includes the domestic market, Jordan and Palestinian authority. You can visit our website to see the reports.
Finally, with regard to the financing of Leviathan, a critical milestone was reached over the last weekend, bringing us a major step closer to the commercialization of the project. We signed a Commitment Letter with HSBC and J.P. Morgan for a limited four year recourse project financing of between $1.5 billion to $1.75 billion for the development of Leviathan. This brings Delek Group and its partners a large step closer to taking the FID to develop the Leviathan field.
In August, an agreement was signed with Ocean Energean for the sale of our 100% rights in Tanin and Karish leases of $148.5 million including Noble’s right, which is the amount invested today. In addition, we will be entitled to receive overriding royalties from production. In terms of the structure of Delek Group, as you know, our gas partnerships are in the midst of the process of a possible merger.
An independent committee appointed by Delek Drillings and Avner's Board recommended that Delek Drilling should be the acquiring partnership and for each 5.32 participation units of Avner, holders will receive one participation unit of the Delek Drilling. This is subject to the approval by the unit holders where a meeting has been scheduled for December 22nd.
Moving outside of the East Mediterranean and International activities, as you know our strategy is to focus on the development of our core assets in the East Mediterranean E&P on the one hand and expand our activities in global E&P markets on the other. Our intention is to become a key international player in the energy industry with operational capabilities. In line with this strategy, we submitted a bid together with Navitas Petroleum.
And on November 9th, we won the rights to offshore exploration license in Block 7 in East Newfoundland, Canada. Our license covers an area of 2,000 square kilometers. According to the Provincial Government of Newfoundland and Labrador, it is estimated that the in-place resource potential of the entire West Orphan geological basin, within which Block 7 is located, is for 25.5 billion barrels of oil and 20.6 Tcf of natural gas.
Delek Group holds 70% of the rights, and our bid totaled CAD48 million which is $36 million at 100%. On November 28th, we announced an agreement with Ratio Petroleum Energy LP, a sister company to Ratio Oil Exploration LP, which is one of our partners in the Leviathan field. Ratio Petroleum is an E&P company with international rights in Guyana, Malta, Ireland and the Philippines. We will be allocated with 17.5% of the available participatory units.
And finally, our stake in Ithaca that we acquired in October 2015, which represent on the equity method, contributed a loss of NIS9 million to the Company's operating profit of the third quarter 2016. The slope was due to the reevaluation of the tax rate in the UK. On operations side, the start-up of the Great Stella Area is expected in early January 2017.
Turning to other non-core businesses, in the downstream business, Delek Israel, our local gas station company contributed NIS37 million to our net income in the third quarter 2016, compared with a contribution of NIS21 million in the same period last year. The improvement despite lower revenues was due to lower sales cost.
Delek Europe, as part of a deal to sell the shares of Delek Europe, carried out in 2014, a loan of €175 million was extended to Delek Europe's buyer. Earlier this month, the loan was repaid ahead of the original repayment date of 2020. As a result, we will recognize a gain of €28 million which is NIS115 million in the fourth quarter of this year.
With regards to our divesture of Phoenix, in August, we entered into a binding agreement with Yango Investment for the sale of our holdings for NIS1.9 billion in cash. We are in the process of obtaining all the necessary regulatory approvals towards completion.
In summary, the past few months of Delek Group has been very positive from an operational and strategic standpoint. We are closer to the FID for Leviathan and the dream is finally moving towards reality. We are successfully marketing Leviathan's natural gas signing major agreements culminating with one of our most significant ones to date with the Jordanian Electric Company.
Tamar production continues to grow in line with our plans and is providing us with growing revenues and profit. Our plan to become an international E&P player started in the North Sea with the stake we acquired in Ithaca at the end of last year, and now advances with the winning of an international license in Canada and our participation with an international player with four other licenses.
We look forward to the coming months and years as was fathered our strategy and bringing Leviathan to realization. And with that, if there are any questions, we all are happy to take them now. Operator?
Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.
I have two questions please. The first one is regard to your international expansion. You announced this year the new block in Canada and this follows last year Ithaca in the North Sea, so can you elaborate a little bit on what's the vision for the Group, is it to acquire new licenses or stake in companies and the financial advisors? And the second question is also regarding the timing of Leviathan FID, you announced all the milestones, so what's left ahead of us before we can see the FID happening?
Okay, I'll start with your second question about Leviathan. I hope FID did not anticipate on the year, we wait until we will have most of agreement that of the basic that we need to get a decision to develop Leviathan. And as you know, we announced about agreement with Jordanian market, we announced about IPP which is independent power player in Israel. We announced about an agreement with Paz, which is the largest fuel oil company about sending natural gas for the own IPP that used for the finally. We have under contract that we're now in negotiation and we hope to reach for agreement.
And of course the second issue that was important was about the finance. As we you know, we conclude all the details with the banks with JP and HSBC. And [indiscernible] money, the capital markets were advised. So after all this, we believe that during the next coming weeks, not better other part we'll launch the projects and announced about the FID. This is the second question.
And the first question was about the strategic movement that Delek is doing. As we announced before, we would like to become an E&P company to arm fund of course in the Israeli and the Mediterranean, if the Mediterranean field including Sipos, the second one will be overseas. Unfortunately, we didn't -- actually until now to control the Company, but basic our argument was biggest shareholder. Now, we own 70% on the Block 7 in Canada, so sometimes it will be direct interval, we'll buy direct interest. Sometimes, we will buy shares and was a big opportunity.
But in the same store and then we'd like to be involved in exploring drilling products and produce oil and gas all over the world. And we still would like to increase our stakes in Ithaca. And of course our focus on all these companies, we would like maybe to be robust. You have to take into consideration that we have to check it very carefully because most of the companies which have best change of [indiscernible] is a trigger their covenant that the Company will have to prepay the debts. So, we have to be very careful about the issues, but we will continue to make best idea.
Here, we have another question by Rafal Gutaj of Bank of America Merrill Lynch. Please go ahead.
Just a quick one on Tamar, I was hoping you could update us on the process of the potential spinouts of that asset and has there been any more thinking of potentially selling or farming down that stake, similarly, we saw BP farming into [indiscernible] recently, I just wondered if that was an avenue you would pursue? Thanks very much.
Look, the regulator gave us what five years to sell them up. So, we still have more than actually half year. We have few sources, fuel strategic source that how we are going to sell it. It can be by spin-off, it can be by slice-by-slice like Noble made 3%. Maybe we spoke about, maybe to spin it into local capital market and fed the equity of the Company. So, ended up to five years, we would be the -- we would not give the shareholder of the Company. We don’t know yet, we don't ask you that [indiscernible]. But of course, it's in our confirmation because still way for on a half year remains at 20%.
[Operator Instructions] There are no further questions at this time. Before I hand the call over to Mr. Bartfeld for his concluding statements, I would like to remind participants that a replay of this call will be available on Delek Group’s website, www.delek-group.com. Mr. Bartfeld, would you like to make your concluding statement?
Yes, I would like to thank everyone that who was in the line and take part on the call. And of course as we say on the time don’t hesitate to call us, if you have any questions, we will be happy to answer you. So, thank you very much and have a good evening or have a good day. Bye, bye.
Thank you. This concludes Delek Group’s third quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.
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