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Edited Transcript of DLEKG.TA earnings conference call or presentation 29-Aug-19 12:30pm GMT

Q2 2019 Delek Group Ltd Earnings Call

NETANYA Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Delek Group Ltd earnings conference call or presentation Thursday, August 29, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Asaf Joseph Bartfeld

Delek Group Ltd. - CEO & President

* Guil Bashan

Delek Group Ltd. - Principal Analyst & Director of IR

* Yonah Weisz

Delek Group Ltd. - Head of IR

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Conference Call Participants

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* Chris Reimer

Barclays Bank PLC, Research Division - 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 Second Quarter 2019 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. (Operator Instructions)

I would now like to hand over the call to Mr. Yonah Weisz, Delek Group's Head of Investor Relations. Mr. Weisz, would you like to begin?

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Yonah Weisz, Delek Group Ltd. - Head of IR [2]

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Thank you, operator. I'd like to welcome all of you to the call today. My name is Yonah Weisz, Head of Investor Relations here at Delek Group. With me in the room are Mr. Gabi Last, Chairman; Mr. Assi Bartfeld, CEO; Mr. Barak Mashraki, CFO, and Mr. Niv Sarne, Head of Business Development. We'll start off by reviewing our second quarter 2019 results, provide an update on the financing of the Chevron acquisition and conclude with your questions.

The second quarter saw net income rise slightly compared to last year while Delek Group continues in its transformation into an energy-focused firm. Revenues in 2Q '19 totaled ILS 2.1 billion compared with ILS 2.07 billion in the same period last year, an increase of 1.4%. Revenues from Tamar was slightly lower year-on-year whilst fuel retail sales demonstrated greater strength.

Operating profit in 2Q '19 totaled ILS 246 million compared with ILS 459 million in 2Q '18, a decrease of 46%. A number of one-off expenses related to Tamar and planned maintenance at Ithaca contributed to lower profits, which were in part offset by stronger performance in the downstream sector.

Net income for 2Q '19 was ILS 190 million compared to ILS 170 million in the same period last year. The current cash balance as of June 30, 2019, was ILS 1.4 billion including unutilized credit lines and marketable securities.

Let's then move to the Eastern Mediterranean. At 2.4 BCM, Tamar's gas sales was slightly lower than 2.6 BCM last year. The number of one-off expenses reduced profits during the second quarter of 2019. These include charges for planned maintenance, high depreciation and the loss of an arbitration case with a customer. More importantly, the Leviathan project is reaching completion. With work now more than 90% complete, we continue to expect first gas to arrive during the fourth quarter of this year. Inspections of the EMG undersea pipeline connecting Israel and Egypt have been completed and we have received certification of the infrastructure. Efforts are still underway to complete the transfer of ownership in EMG shares to the partnership taking control of the pipeline, and the acquisition is expected to complete by the end of September 2019. When this concludes, gas exports to Egypt within the context of the Dolphinus sales agreement are set to begin along with the commencement of Leviathan covering annual volumes of up to 7 BCM.

Looking to the North Sea. Ithaca Energy's results improved compared to last year despite 1 month downtime for planned maintenance work. Ithaca's contribution to Delek Group's 2Q '19 net income rose to ILS 27 million from a loss of ILS 32 million in 2018. Average daily production stood at 15,200 barrels of oil equivalent, up from 12,800 last year. Production costs of $27 per barrel were impacted by lower-than-usual volume and were higher compared to $23 in 2Q '18. Exploration at the Tau prospect in the Gulf of Mexico concluded during 1Q '19. And while indications of hydrocarbons are present, no exploitable discoveries were made. With the complex geology in the prospect and the need for specialized drilling equipment, we are assessing the conditions for proceeding further at this location.

Finally, Delek Group's evolution into a global energy firm is now in full motion. We are approaching complete divestment of our main noncore assets, allowing reallocation of capital and management focus to investments in the E&P sector. During 1Q '19, the group sold 30% of shares in IDE desalination for ILS 530 million. We also have reached an agreement during 2Q '19 for the sale of a 32.5% stake in Phoenix Insurance Company for ILS 1.64 billion and we hope to complete this during October.

Finally, Delek Group and Ithaca continue to secure financing for its acquisition of Chevron's North Sea assets. The transaction has an effective date of January 1, 2019, and is expected to close during the fourth quarter. Accounting for cash flows generated during this period, we anticipate a net price of approximately $1.65 billion along with a payment of $150 million to cover working capital. In addition to this amount, Ithaca will be refinancing its existing debt of approximately $550 million.

RBLs and bonds with a total value of USD 1.55 billion have already been arranged. Delek Group is negotiating an additional equity inflow of approximately USD 300 million through the issuance of preferred Ithaca shares and is also seeking a USD 150 million advanced payment from commodity traders as part of long-term offtake agreement for Ithaca's oil production. Taking into account a $200 million deposit already paid to Chevron on the date of signing, Delek Group and Ithaca expect to allocate an additional $200 million of capital to complete the purchase.

To sum up, with Leviathan on its way to commissioning, the divestment of the noncore Phoenix Insurance Company making good progress and a major new investment in the North Sea, Delek Group is delivering on its strategy of becoming an international energy firm. We are positioned for strong future growth and for the potential to increase returns to shareholders.

And with that, operator, let's move to questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Tavy Rosner of Barclays.

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

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This is Chris Reimer on for Tavy. Can you tell me about the plan to split Delek Drilling and its shares in Europe? And where does that stand?

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Yonah Weisz, Delek Group Ltd. - Head of IR [3]

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Could you repeat the question please?

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

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Yes. A while ago, there was a plan to split the assets of Delek Drilling and listing separately. I was just wondering what is the current status on that.

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Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [5]

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The status that Delek Drilling is still checking in the -- to see which change will go, what will be the tax event. So we will have something to declare, I guess, then we'll announce about it. No, we don't have any news about [it] officially.

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

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Okay. And it was announced over the quarter that you contracted with SLNG engineers. Can you give any more color on that? And how would that compare to export to the LNG facilities in Egypt?

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Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [7]

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Okay. We have here now Guil Bashan for Delek Drilling and he will take the question.

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Guil Bashan, Delek Group Ltd. - Principal Analyst & Director of IR [8]

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So we did sign a contract with 2 suppliers of SLNG. That's in very preliminary stages in order to put down the possibility of building a floating LNG facility. So I guess this is for future phases of Leviathan. We're still examining this possibility and it's in very early stages. It has nothing to do with Egypt and our ability to secure an uptake with one of the LNG facilities there. So this is a complementary deal rather than -- instead of a...

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [9]

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Okay. That's helpful. Just about the EMG deal, can you give some color about what exactly is left to happen in order for that deal to be completed?

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Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [10]

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Yes. So basically we have described the progress of those that are left to be accomplished to secure the deal in both Delek Drilling and Delek Group, immediately thought about that. It's mostly associated with procedural order we need to undergo in Egypt and those are done one after the other so it would mean that we cannot accomplish them together. Once we receive some kind of permit, we can move to the other, et cetera, et cetera. Because EMG is quite a complicated company under special law in Sinai under Chapter 11, we have some procedural orders that we need to accomplish, and it takes a little bit more time than we have anticipated. But basically, it has no real effect on neither cash flow or spend since we need to finalize the deal first before first gas and we are certain that we have the ability to do that.

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Operator [11]

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(Operator Instructions) There are no further questions at this time. Before I hand the call over to Mr. Weisz for his 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. Mr. Weisz, would you like to make your concluding statement?

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Yonah Weisz, Delek Group Ltd. - Head of IR [12]

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Thank you all for joining, and we look forward to seeing you next quarter. Take care.

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Operator [13]

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