Analyst issues Strong Buy recommendation for three Delek Group partnerships, two other explorers.
By Lior Zeno

Israeli gas and oil exploration shares are severely undervalued, ruled DS Apex Monday.

Analyst Amir Foster issued a strong Buy recommendation for three Delek Group companies and two others in the oil and gas exploration sector.

Photo by: Albatross

DS Apex set target prices for Delek Energy Systems, Delek Drilling Limited Partnership and Avner Oil Exploration Limited Partnership that were more than 50% their current market values.

The brokerage also rated Isramco Negev 2 and Ratio Oil Exploration shares at Outperform, giving them target prices of respectively 25% and 18% more than their current trading prices.

“The natural gas economy, in terms of both supply and demand, is still in its infancy,” wrote DS Apex analyst Amir Foster. “A lot of water will flow past the rigs before things become more certain. Meanwhile it seems there is no lack of interesting opportunities for both investors and Israeli economic development, but no shortage of risk, either.”

Delek Drilling and Avner each hold 15.6% of the Tamar gas field, 22.7% of the Leviathan gas field, and 25.5% and 23% respectively of the Tethys Sea field. While Isramco, with its 28.7% share in Tamar, was given a low risk rating by DS Apex, Ratio – with its 15% share in Leviathan – was given a high risk rating, hinting at what Foster meant.

“For exposure to the chance of finding oil at Leviathan, the best option is through Delek Drilling and Avner,” added Foster. “Such an investment can provide exposure at a discount.”

DS Apex estimates that Israel’s natural gas consumption will be 15 billion cubic meters by 2020 and 23 BCM by 2030.

Foster estimates the value of the Tamar field to be $7.3 billion, with a per-share price of $5.95, and projects it will increase 0.5% annually. The international oil and gas consulting firm NSAI, which performed a financial analysis of the companies, predicted an annual 2% price increase.

A windfall for the state: $22.6 billion

Another interesting item in Foster’s analysis is the projection from his valuation model that government revenues from Tamar’s gas profits will be $22.6 billion in total (today, worth about $4.9 billion ).

Leviathan’s future remains less clear, with its gas likely to be exported – requiring heavy additional investment and critical decision making. Foster wrote that he estimates its gas is worth $5.4 billion, assuming output starting at 3.5 BCM in 2017 and stabilizing at 7 BCM from 2018 onward. Foster added that the output can be expected to double, to 14 BCM, which would let the field be operational until the late 2040s.