The market believes that company's sales projections for the Tamar gas reservoir are over-optimistic, and is pricing the company accordingly.
A month-long downtrend in the oil and gas stocks traded on the Tel Aviv Stock Exchange (TASE) was interrupted yesterday by a correction. Ratio, Delek Group, Delek Drilling, and Navitas led the turnaround with gains of 4-6%, after the sector index had lost over 20% during the global downturn in oil prices, which picked up speed with the spread of the Chinese coronavirus.Trailing behind the other oil and gas shares yesterday was Tamar Petroleum, which holds 16.75% of the rights in the Tamar natural gas reservoir. Since trading in Tamar Petroleum began on the TASE in 2017, the stock has lost 70% of its value in tandem with the steep fall in the value of its underlying asset - the Tamar reservoir.
In term of historic profit multiple, Tamar Petroleum is incredibly cheap. The company's recent loss in market cap is NIS 460 million, while its net profit in the first nine months of 2019 was NIS 340 million. Assuming a NIS 440 million profit for the year, Tamar Petroleum is currently trading at a historic multiple of just 1-1.1.
The capital market, however, acts according to expectations and forecasts, so the historic profit multiple is not very important; the company's current share price reflects a pessimistic scenario. This is indicated by the relatively high yields at which the two bond series issued by Tamar Petroleum are being traded: 7.6-7.8%. Still, this is a reasonable yield, considering the company's level of risk and its business environment.
Unsuccessful offering, rejected merger
Investment institutions were apparently worried that Tamar Petroleum would have trouble meeting its bond obligations of nearly NIS 4 billion in the coming years, given the mounting competition in the natural gas market and expected fall in gas prices. The failure of the offering came shortly after Tamar Petroleum's merger offer to Alon Natural Gas Exploration, which also holds rights in Tamar, was rejected by Alon's board of directors.
Capital market players are currently pricing a decrease in the quantity of gas that the Tamar reservoir will supply in the coming years, despite the beginning of exports to Egypt and Jordan, coupled with a steep drop in gas prices. The average price of the gas supplied by the reservoir in the third quarter of 2019 was $5.60 per BTU, which is projected to fall to around $4 per BTU in the coming years.
Karish and Leviathan taking away market share
According to the November presentation, Tamar is expected to supply a little over 9 BCM in 2020, 8.5 BCM in 2021, and 8 BCM to the domestic market and 2.2 BCM more in exports to Egypt and Jordan annually in 2022-2025. Several analysts and players in the capital market cast doubt on these predictions; they believe that the quantities will be far lower.
There are solid grounds for expecting a fall in quantities and prices. There is currently a large surplus of gas in the domestic market with the commencement of supply from Leviathan earlier this year. This surplus is projected to grow in 2021, when Energean's Karish reservoir begins supplying gas to customers.
Presentations by the companies and partnerships show that a fairly continuous rise in domestic demand for gas is expected in the coming years, among other things due to the gradual shutdown of coal-fired power stations and the switch to electricity production using natural gas and renewable energy. At the same time, it appears that the underlying assumptions for the presentations are overly optimistic, given the increasing efficiency of power production using solar and wind energy in recent years, a trend that is expected to continue.
The improvement in renewable energy output, which has made it cheaper to produce electricity from solar energy than from coal or gas, coupled with the global trend towards reduced use of polluting fuel, obviously has a negative impact on the pricing of conventional energy companies and partnerships in Israel and worldwide.
In addition to the steep fall in the price of gas, as of now, the possibility of exporting gas from Leviathan to Europe has been virtually eliminated. This means that a lot more gas will be looking for customers in Israel and the surrounding area in the coming years.
Investment institutions losing money on paper
The offering represented a $12 billion valuation for the Tamar reservoir, which is currently priced at less than half of that. Tamar Petroleum raised $560 million more in a March 2018 bond issue, which it used to buy 7.5% more of the rights in Tamar, this time from Noble Energy.
Delek Drilling currently holds 22% of Tamar Petroleum's shares, which it must sell in one way or another by the end of 2021. Given the steep drop in Tamar Petroleum's market cap, the market believes that the more likely possibility is distribution of Tamar Petroleum's shares as a dividend in kind to shareholders in Delek Drilling (headed by Yitzhak Tshuva's Delek Group).
Another question concerning Tamar is the actions of Noble Energy, which holds 25% of the Tamar reservoir, together with a 39.7% holding in Leviathan. Both Noble Energy and Delek Drilling, which directly holds 45% of the rights in Leviathan and 22% of the rights in Tamar, have a much stronger interest in promoting Leviathan than in promoting Tamar.
Besides Delek Drilling, a number of investment institutions have substantial holdings in Tamar Petroleum: the provident funds of Menorah Mivtachim (12.5%), Altshuler Shaham (11.3% for its provident and mutual funds), Migdal (9.5%), and Harel (6.1%). All of these have lost substantial amounts of money on paper on their investments in Tamar Petroleum's shares.
Tamar Petroleum ran into a brick wall last month, when it tried to raise NIS 140 million in a share offering in a bull market, but could not pull it off. The company decided to postpone the offering, attributing the postponement to "market conditions."
The biggest problem facing the Tamar reservoir, however, is probably the prospect of a substantial reduction in the quantity of gas that it supplies. Gas consumption in Israel totaled 11.2 billion BCM in 2019. According to its presentation last November, Tamar Petroleum believes that demand will jump to 19 BCM in 2025 and 22 BCM in 2030, with the increase coming mainly from demand on the part of private electricity producers, industry, and transportation.
Tamar Petroleum, a special purpose vehicle founded by the Delek Drilling partnership, held its IPO in July 2017, raising $650 million (NIS 2.4 billion) in a bond issue and $200 million more in an equity offering. The money was used to acquire 9.25% of the rights in the Tamar reservoir from Delek Drilling.