Israel’s Delek group’s happy November belies difficulties

The last month has been an unusually happy one for Yitzhak Tshuva, whose energy-focused Delek Group is beset by low oil prices and big debt. Since the start of November, Delek Group shares have climbed almost 75% and are worth almost double what they were at their low last March.

The latest gains occurred on Thursday, when Delek Group shares jumped 10.5% after it reported a 130% increase in third-quarter net profit to 149 million shekels ($45.2 million), and again on Sunday, when it closed up 7.5% at 107.50 shekels after saying its Delek Drilling unit would be listing its shares in London.

“The successful performance of our core assets together with encouraging macroeconomic figures that emerged in the last couple of weeks, driven mainly by the successful efforts to find a vaccine for COVID-19, and their positive impact on energy prices, provide a tailwind to continue implementing Delek Group’s strategy and increase the value of our core assets,” CEO Idan Wallace said about the third quarter.

Nevertheless, the good news is only relative. Delek Group is still down more than 80% from its high at the start of 2020 and its market cap is just 1.6 billion shekels. The company has been in deep financial trouble due to its highly leveraged purchase of North Sea energy assets from the energy giant Chevron for $2 billion just as global oil prices were plunging.

Prices for Delek bonds have also seen gains in the last few weeks, but they are still trading at junk-bond-style double-digit yields, which preclude the company from recycling the debt when it comes due. While its Lamed-aleph bonds, for instance, have climbed 350% since their low last March, that left their price at just 69 agorot on Sunday, reflecting a yield of about 26%.

The revival of Delek shares over the last month is a function of several factors, among them the sale of assets that brought in 2.1 billion shekels in cash. In addition, it raised 310 million shekels in new capital. As well, Delek Drilling sold 2.25 billion shekels in bonds, using its Leviathan holding as collateral.

Delek even benefitted, ironically, from Chevron, which earlier this year acquired Noble Energy, Delek’s partner in the Israeli and Cypriot gas fields. That gives Delek a much bigger and financially stronger partner in the energy business. Meanwhile, announcements of coronavirus vaccines by Pzifer and Moderna helped lift global oil prices.

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Nevertheless, Delek Group still carries a “going concern” warning on its financial statements. It still had losses amounting to 3 billion shekels in the first nine months of the year, compared with a 545 million shekel profit the same time in 2019. The big loss was mainly due to write-owns in the value of Ithaca’s assets and losses on asset sales.

Delek Group’s cash flow reports, which forecast its ability to repay debt coming due in the future, show that Tshuva still does not quite have the resources to fulfill the group’s obligations. However, it does show that his room for maneuver had grown. The company is even preparing a program to buy back some of its bonds.

At the end of the quarter Delek Group had 140 million shekels in cash, but since then it has sold a 60% stake in its Delek Israel unit for 450 million shekels and collected a 354 million shekel divided from Ithaca. It has also completed securitizing the overriding royalties from Leviathan in an amount of 608 million shekels.

The Delek Drilling IPO in London aims to raise more capital. The draft prospectus calls for Delek Drilling to be split into two, with the London-listed company controlling stakes in Israel’s Leviathan and Cyrpus’ Aphrodite gas fields while the Delek Drilling listed on the Tel Aviv Stock Exchange will continue to hold stakes in Israel’s Tamar and Dalit fields.

However, Delek Drilling warned on Sunday that the offering hinges on it receiving regulatory approvals in Israel and abroad and “on obtaining commercial agreements and approvals from third parties, the date of which this report has not yet been clarified and there is no certainty that they can be completed and under what conditions.”

Meanwhile, Delek Group must repay 1.5 billion shekels in debt in 2021 and another 1.2 billion shekels in 2022 to bondholders. It hopes to raise 360 million from dividends paid to it by Delek Drilling, Ithaca and Delek Israel. It expects another 213 million from the sale of its Delek Israel shares and real estate divestments.

All that should increase Delek Group’s liquidity by 950 million shekels and increase its chances of meeting its obligations in 2021. But it still isn’t enough to cover all of next year, much less 2022. As a result, Delek Group is talking to several foreign banks for a $200 million loan using Ithaca shares as collateral.

It also wants to raise capital through Ithaca, either by selling a stake to a partner or listing its shares. A third alternative is merging with another foreign energy company.