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Edited Transcript of DLEKG.TA earnings conference call or presentation 4-May-20 3:00pm GMT

Q4 2019 Delek Group Ltd Earnings Call

NETANYA May 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Delek Group Ltd earnings conference call or presentation Monday, May 4, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Idan Wallace

Delek Group Ltd. - CEO

* Limor Gruber

Delek Group Ltd. - Head of IR

* Yossi Abu

Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd

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Conference Call Participants

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* Catherine Hunter;IHS Markit

* Chris Reimer

Barclays Bank PLC, Research Division - Analyst

* Robin Alfred Haworth

Stifel, Nicolaus & Company, Incorporated, Research Division - Director of European Oil & Gas and Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Delek Group Fourth Quarter and Full Year 2019 Results Conference Call.

If you have not yet received the 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 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. (Operator Instructions)

I would now like to hand over the call to Ms. Limor Gruber, Delek Group Head of Investor Relations. Ms. Gruber, please go ahead.

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Limor Gruber, Delek Group Ltd. - Head of IR [2]

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Hello, everyone. Welcome, and thank you for joining our conference call following the publication of the financial statements for 2019. The financial statements can be found on our website at www.delek-group.com.

With us today are the company's CEO, Idan Wallace; Executive Vice President and CFO, Barak Mashraki; and the company's Legal Counsel, Leora Pratt Levin. Also joining us on the line today are Yossi Abu, CEO of Delek Drilling; and Niv Sarne, Head of Energy Business Development and M&A.

A recording of this call will also be available on our website.

We will start with some opening remarks from the company's CEO, Idan Wallace. And following that, management will be available for the questions-and-answer session. Idan, please.

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Idan Wallace, Delek Group Ltd. - CEO [3]

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Thanks a lot, Limor. Hello to everyone, and thank you for joining us today. Yesterday, Delek Group published its financial statements, and I hope you have had the opportunity to go over the main points. 2019 was the year in which we significantly developed our gas and oil businesses globally, and we focus our activities in this area as part of our strategy.

At the end of 2019, the development of the first stage of the Leviathan field ended and marketing to the customers in Israel, to Jordan and to Egypt, and it commenced right at the beginning of the year. Production at the Leviathan is proceeding smoothly and currently runs at a rate of 7 BCM per annum, and we are continuing with the necessary action to ramp up the production rate up to 12 BCM per annum, which was our initial plan.

Ithaca, our wholly owned subsidiary, which operates in the U.K. North Sea, has successfully integrated the assets of the Chevron deal into its portfolio. The transaction tripled the size of Ithaca reserves and increased its production capacity, giving Ithaca high quality competitive assets and turning it into one of the leading independent energy companies in the British North Sea.

Ithaca EBITDA for 2019, Ithaca published its financial statement last week, including the acquired assets, was USD 950 million and cash flow from the operation net of investment was over USD 650 million.

During the year, we deposit -- we disposed of assets that were not part of our core business for a sum of ILS 2.4 billion in cash, which we used to strengthen our position as a leading energy company.

Due to the spread of the COVID-19, as we all know, the global energy market suffered in the recent months' high volatility that we've seen in the prices of the energy market and the oil and gas. At the same time, the company is working intensively, practically night and day to progress and to implement process and action to improve its financial flexibility and liquidity. And we believe this, together with our high-quality assets, will allow us to successfully overcome the crisis in the energy market and to continue the trend of development and growth of our business. Just as an example, in the recent months, we have sold the balance of our holdings in the desalination company, IDE, we hold 20%, for ILS 164 million, and in Cohen development, for ILS 216 million.

At the same time, we have made repayments of principal to debenture holder of ILS 370 million and have reduced our borrowing from banks by ILS 800 million. This all happened in the last 3 months, in the beginning of 2020, in the first quarter.

Just in the last few days, we also have announced the closing of part of our swap transaction for shares in the Phoenix and have released ILS 82 million in cash.

As we said earlier, we are working to divest additional noncore assets, which include amongst other, our holdings in Delek Israel, and our rights to receive royalties from our holdings in Karish and Tanin reservoirs and also in Leviathan. In addition, we are preparing to raise capital and to strengthen liquidity and financial position.

These actions that we are taking are all part of the strategy that the group adopted in order to face the crisis in the energy market. And as I said, we've been working very hard and continuing to work in order to implement this strategy. We believe in the assets of the company. We believe we have the ability to overcome the current challenges in the market, and we have the financial flexibility that's required in order to overcome this.

These steps and additional measures which we are currently working on point to the group's quality assets and the flexibility they give to us. Even if a given transaction doesn't materialize the way we planned, we still have an arsenal of potential transactions to strengthen our financial position.

It is also important to note that our core holdings, Delek Drilling and Ithaca, are very well positioned to ride out the crisis. Both companies promote measures and processes, which should support this goal. If we take Ithaca for example, its significant cash flow generation will also be driven by certain steps that Ithaca adopted and announced last week with its financial statement. So for instance, the cost reduction program that the company is carrying out to reduce the production cost from $7 to $15 per barrel and to reduce investment by 50% to $125 million. Ithaca financial situation continued to be strong with a net financial debt of USD 1.4 billion at the end of the first quarter of 2020 and high liquidity with cash balances and an RBL balance of USD 300 million.

In conclusion, as we all know, this is indeed a challenging time in the global market, and in particular, in the oil and gas market, maybe one of the most challenging periods in the global economy. Nevertheless, it will pass, and we are already starting to see a slow exit from the lockdowns around the world. We believe this will have implication on the demand and prices in the energy market, and it can provide the support for the completion of a range of business measures we are taking that will enable us to emerge strengthened from this global crisis.

Thank you very much, and we are ready to take your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Chris Reimer of Barclays.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [2]

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I think my questions are mostly directed to Yossi, begin with -- can you provide an indication of impact on demand since the coronavirus outbreak, especially relating to the IEC?

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Yossi Abu, Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd [3]

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So basically -- it's Yossi Abu speaking. I think that definitely, we are expecting some shrink in the overall macroeconomic activity in Israel and that will affect the demand in Israel. We assumed in our annual report around 5% kind of less of income with respect to Tamar and Leviathan overall, but this is not because we saw a 5% shrink, just kind of taking, let's say, a conservative approach vis-à-vis the market and the uncertainty in the market.

One thing which we can see is obviously the seasonality. So -- anyhow, we have during the April reduction in consumption due to the seasonality. But there's one thing which can eliminate some of that less demand for natural gas and this is basically a reduction in coal consumption, which we saw during the last weeks. ICE basically shutting some of their coal units and that obviously contributed to gas consumption. It's too early to come and say, well, we are expecting that decline or that. But I think that it's very frank to say that that's supposed to be in a low percentage. It's not something extremely meaningful.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [4]

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Okay. And just relating to the clause for the reduction in take-or-pay amounts from Dolphinus, how confident are you in sustaining current contracted amounts? And how might structural demand in Egypt or perhaps [option] pricing arrangements serve to mitigate a reduction in volume?

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Yossi Abu, Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd [5]

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So first, I would start and say, we are continuing to supply both Egypt and Jordan according to the agreement, and we are not seeing anything which is not according to the agreement in this stage. And obviously, this has built our confidence.

Second thing, I think that we should look on the midterm or the immediate term and even the mid and long term differently. What we are seeing in Egypt is obviously less demand because of shutting of the industry, et cetera, et cetera. Now they are going out. But on the other hand, I think that there's certain level of activity, which will support our activity in the midterm, even in the year or 2 or 3.

And what we are seeing is that a lot of work that supposed to come online in Egypt has been delayed due to coronavirus. A lot of cuts by the major -- cut of investment of CapEx by the majors will probably hit some of the production in the region, and that obviously give us some level of confidence that we'll have more room to our activities.

I think that we also saw some dry wells in the region again, so that -- some of those that people told that will come online if there will be discovery, they are out there, in few licenses in the region. And that definitely support existing facilities, Leviathan and obviously Tamar (inaudible).

Also some of the news, and I cannot say a lot about it on the (inaudible) obviously give a lot of room to Tamar and Leviathan for a certain period that currently is not in the base model. So for one end, yes, I think that everybody is expecting less demand in the immediate term. On that end, when we are looking on the midterm, 2, 3 years in advance, there's a lot of, I would say, structural activities that will allow more gas to flow from Tamar and Leviathan to the markets.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [6]

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Okay. That was very helpful. In the press release and also in the comments earlier, the production volume at Leviathan is stated at 7 BCM. And as mentioned, this is lower than expected. So is this all due to the ramp-up process? And can you provide any color on how far there is to go until you might reach the higher levels?

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Yossi Abu, Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd [7]

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Yes. No, definitely. The current -- basically based on our plan in advance, Q1 was supposed to be around 700 million to 800 million scf a day. And right now, we are in the middle of a process to implement some facilities in Leviathan, called tube expanders, which will basically take the supply capability to 1.2 Bcf a day. We are just in the middle of this process, and we are doing that according to the timetable that we put to ourselves in 2017. So coronavirus doesn't affect that.

And by the way, you can also saw -- see that in the deal that we structured with the Egyptian, when basically we have 200 million scf a day into early 2020. So until 1st of July, and then we are going up Tamar and Leviathan together 350 from Leviathan and another 100 from Tamar, so a total of 450. And that was based on that tube expanders coming online. So the 700, 800 was something that we expected and was designed to. And we are expecting 1.2 Bcf capacity by the next few weeks and before the summer to be online.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [8]

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Okay. Just on Tamar, and it's been mentioned in reports a ruling from the court with the minority shareholders at Tamar. What impact can we expect from this, especially with regards to Leviathan and the contract with IEC?

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Yossi Abu, Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd [9]

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So to date, we are selling from Leviathan to IEC according to the contract that we have been signed, and the same from Tamar to IEC according to the base contract that has been signed. There's overall discussion right now to -- with -- between the Tamar partner to reach some kind of alignment that -- some kind of a guidance that we get from the regulators who are on it. And I believe that in the next 2, 3 weeks, we'll be able to say something about it. I don't want to get into details. It's work in process. It's really tactical, right, because the ICE agreement is for a year now. Actually, right now left around a year. So let's take that in that proportion. So I'm not expecting any material impact to the project as it's a short-term contract, anyhow.

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Operator [10]

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The next question is from Robin Haworth of Stifel.

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Robin Alfred Haworth, Stifel, Nicolaus & Company, Incorporated, Research Division - Director of European Oil & Gas and Research Analyst [11]

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Just on the -- you mentioned the divestment of the Karish royalty. I was just wondering if you could give any color on the potential timing for that divestment, please?

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Yossi Abu, Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd [12]

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I will start with Delek Drilling. Delek Drilling is not in any process of divestment of Karish and Tanin royalty. Maybe the question was to the group. So -- but just to make sure, Delek Drilling is not the seller.

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Idan Wallace, Delek Group Ltd. - CEO [13]

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With regards to Delek Group and Delek Energy, we are currently considering 2 options that we have that we also announced of them. First one is the facility -- financing facility against these royalties, and we are in the progress stage with one -- with a leading financing institution. And the second one is a negotiation that we have in order to sell these royalties. Again, I'm only referring to the royalties in the level of Delek Group and Delek Energy.

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Operator [14]

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(Operator Instructions) The next question is from Cath Hunter of IHS Markit.

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Catherine Hunter;IHS Markit, [15]

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I wanted to -- if I could come back to -- about what's going on at Aphrodite. So you had renewed terms, better terms from last November with the idea of drilling an appraisal well this year and potentially taking FID. What's happened to the time frame on that one? And what are your expectations?

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Yossi Abu, Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd [16]

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So obviously, we renegotiate the [T&C] in order to go to development, and that was the target, and this is what we want to do. The coronavirus and what happened in the energy market changed the perception vis-à-vis LNG. As you know, the target was equal [that]. We are analyzing and we are working with our partners on it diligently. And we are still having the target to develop Aphrodite and to provide gas from Aphrodite to Idku, and this is the target.

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Catherine Hunter;IHS Markit, [17]

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And can I have a follow-up question on Egypt, please. Going back to the point about the Dolphinus deal. So as we understand it, when prices fall below $50 a barrel, there is an option for the Egyptian side to reduce the contract volumes by around 50%. Is that option going to be exercised this year on your understanding? And then what will that mean exactly in terms of life of contract volumes? Do they have to kind of make up those volumes over time? Or does that apply to the whole life of contract volume as well?

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Yossi Abu, Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd [18]

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So the way that it work is only by the end of the year when they see for this year -- by the end of the year, if they take less -- if the Brent was less than $50 per barrel, then they can reduce the quantity to 50% take-or-pay. That's basically the agreement. Obviously, in this stage, I cannot say if they will exercise the option, but this is only for this year, and supply every year has been -- there were some noises in the background, sorry.

So this is obviously for this year. And every year, they will need to check, every year that the Brent is below $50 per barrel. So it will be a yearly check.

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Catherine Hunter;IHS Markit, [19]

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And so you said, it's 50% take-or-pay. So assuming the take-or-pay is 75%, then it is actually...

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Yossi Abu, Delek Group Ltd. - CEO of Delek Drilling Management (1993) Ltd [20]

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Just to be correct, the take-or-pay will be 50%. It's not 50% of the take-or-pay. The take-or-pay is 50%. So that's important to understand, it's not a reduction by 50%. It's much less.

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Operator [21]

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There are no further questions at this time. Before I hand the call over to Ms. Gruber for the concluding statement, I would like to remind participants that a replay of this call will be available on Delek Group's website, www.delek-group.com.

Ms. Gruber, would you like to make your concluding statement?

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Limor Gruber, Delek Group Ltd. - Head of IR [22]

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Yes. Thank you. Thank you, everyone, for joining us today. And if you have any further questions, you can find the contact details on our website, and we will be happy to take them. Thank you, and good day.

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Operator [23]

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Thank you. This concludes Delek Group's Fourth Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.