U.S. Markets closed

Edited Transcript of DLEKG.TA earnings conference call or presentation 2-Dec-19 1:30pm GMT

Q3 2019 Delek Group Ltd Earnings Call

NETANYA Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Delek Group Ltd earnings conference call or presentation Monday, December 2, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Asaf Joseph Bartfeld

Delek Group Ltd. - CEO & President

* Idan Wallace

Delek Group Ltd. - Deputy CEO & Executive VP

* Yonah Weisz

Delek Group Ltd. - Head of IR

================================================================================

Conference Call Participants

================================================================================

* Catherine Hunter

* Chris Reimer

Barclays Bank PLC, Research Division - Analyst

* David Nasaniel Dreman

Dreman Value Management, L.L.C. - Founder, Chairman, CIO & Chief Compliance Officer

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to the Delek Group's Third Quarter 2019 Results Conference Call. If you have not 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're providing during this conference call may include forward-looking statements. These are various important factors that may cause the company's actual results to differ significantly from those set forward 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, please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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; and Mr. Barak Mashraki, CFO. We'll start off by reviewing our third quarter 2019 results and move to operations in the Eastern Mediterranean and North Sea, concluding with questions.

The third quarter saw net income fall compared to 3Q 2018. But at the same time, Delek Group achieved full implementation of its strategy, becoming an international energy firm with the completion of acquisition of Chevron's North Sea assets. Revenues for 9 months 2019 totaled ILS 6.1 billion, unchanged from 9 months 2018.

In the third quarter of 2019, revenues totaled ILS 2 billion compared with ILS 2.2 billion in 3Q '18, a decrease of 9%. This was mainly driven by lower contribution from Ithaca Energy. These results do not include revenues from the recently acquired Chevron North Sea assets, which will begin to appear on Ithaca's P&L as of the fourth quarter. Operating profit for 9 months 2019 totaled ILS 1 billion, lower than ILS 1.2 billion in 9 months 2018. In the third quarter of 2019, operating profit totaled ILS 306 million compared with ILS 397 million in 3Q '18, a decrease of 23%.

Net income from 9 months 2019 totaled ILS 545 million, lower than ILS 736 million seen in 9 months 2018. In the third quarter of 2019, net income was ILS 65 million compared with ILS 323 million in 3Q '18. The large difference was due to a revaluation of the Phoenix Insurance Company, which have boosted prior period results. The current cash balance at the end of November 2019 was approximately ILS 1 billion, including unused credit lines and marketable securities.

Let's move then to the Eastern Mediterranean. At 2.8 BCM, Tamar's gas sales volumes were similar to the same period last year. More importantly, the Leviathan project is almost complete, with first commercial gas deliveries expected in the coming weeks. Export infrastructure for the Egyptian and Jordanian market has been inspected and is ready for operation. This is notably so for the EMG undersea pipeline, connecting Israel and Egypt, where the transfer of ownership to the partnership taking control of the assets has been confirmed. Along with supply to domestic Israeli customers, Leviathan will also begin exporting gas to Egypt and Jordan by the end of this year.

In the North Sea, Ithaca Energy contributed ILS 54 million to Delek Group's operating income in the quarter compared with a ILS 151 million contribution in 3Q '18. Cash flow from operations stood at a healthy ILS 113 million for the quarter. Due to maintenance at Delek, average daily production stood at 15,700 barrels of oil equivalent, down from 16,500 in the similar period last year. Production costs of $21 per barrel were impacted by lower than usual volumes and were higher compared to $17 in 3Q '18. Accounting for the acquisition of Chevron assets completed last month, Ithaca's pro forma full year 2019 production should average approximately 75,000 barrels equivalent per day, with the fourth quarter in the 80,000 barrels equivalent per daily average.

From a strategy point of view, Delek Group's evolution into a global LNG company is now complete. We have fully divested the last of our major non-core holdings and completed a significant new investment in Chevron North Sea. With 95% of our assets now linked to energy, the company has achieved its goal of transforming itself into a pure-play international E&P firm.

And as a last point, I'd like to note a change in Delek Group's senior management. Mr. Assi Bartfeld, the group's CEO for the past 20 years, has announced, he will be retiring at the end of this month. Assi, for such a long time, brought leadership and vision to Delek Group, combining it all with a touch of modesty. Everyone here at the company says, thank you, and we wish you all the best in your future endeavors. At the same time, we welcome, Mr. Idan Wallace, currently Deputy CEO, who will take up the position of Chief Executive Officer on the 1st of January 2020.

To sum up, with Leviathan production only weeks away, the divestment of the noncore Phoenix Insurance Company complete, and the conclusion of a major new investment in the North Sea, Delek Group has achieved a strategy of becoming an international LNG front. The next steps along that path include the integration of Chevron assets into Ithaca Energy and Ithaca's potential IPO on the London Stock exchange.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

This is Chris Reimer on for Tavy. I have a big picture question. This year with the divestment of Phoenix finalized and the acquisition of Chevron assets, looking to 2020, what should we look forward to from a corporate perspective such as a debt refinancing or listing on foreign exchange for the group? And where might those items fit in, in relation to a potential IPO for Ithaca?

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [3]

--------------------------------------------------------------------------------

Okay. I can say now is, first of all, we are in negotiation to find an equity partner who will join us to Ithaca. We started before we closed the deal. We didn't reach for -- to an agreement until closing, but still we want somebody will come with us and to be and have -- to be a partner with us. So this is one of the main goals for the near future. And I hope we will find somebody else. That when I said to find an equity partner, we mean that the money -- that we will sell part of our shares in Ithaca and the money will reach -- will arrive to the Delek Group level, not to inject the money in the company. We hope to reach an agreement. This is one of the goals for the next year. The second one is, of course, to take Ithaca for an IPO in the stock exchange London in the main list. This is one of our goals that we would like to achieve. I don't -- I cannot project it would be in the 6 first months or the 6 after, but still we're working about -- to try to find an equity partner, also working with IPO market, still maybe -- when we go for the IPO, it will be a combination between offer -- selling an offer, right? Of course, an IPO, which -- part of the money will come to the company. Another target or main goal is, of course, starting floating gas for Leviathan, which I hope will happen in the next 2 or 3 weeks. I hope at the end of the month or end of the year, Leviathan starts floating gas beginning with the Egypt market. With Dolphinus deal, we believe it will happen. So this was the same main -- same issues that will take part in the Delek Group for the next year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And just to follow up on that. Are you considering further acquisitions or expanding into new geographies as part of the near-term strategy?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I don't think Delek will go for new geographies. But there is plan to extend our activity in the North Sea by Ithaca. And maybe we'll continue on the GOM, on Gulf of Mexico that we started last year, and we still have a license there. And maybe we'll go back to the Gulf -- I forgot the name of the...

--------------------------------------------------------------------------------

Unidentified Company Representative, [6]

--------------------------------------------------------------------------------

Tau.

--------------------------------------------------------------------------------

Yonah Weisz, Delek Group Ltd. - Head of IR [7]

--------------------------------------------------------------------------------

Tau.

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [8]

--------------------------------------------------------------------------------

To the Tau. And [when we have] a license and we will try to reach to the targets that the geologists gave us. But I don't see that we go for -- in other geographic places.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

The next question is from David Dreman of Dreman Value Management.

--------------------------------------------------------------------------------

David Nasaniel Dreman, Dreman Value Management, L.L.C. - Founder, Chairman, CIO & Chief Compliance Officer [10]

--------------------------------------------------------------------------------

How much cash flow can Delek Group expect from Leviathan in 2020?

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [11]

--------------------------------------------------------------------------------

Can you raise your voice?

--------------------------------------------------------------------------------

David Nasaniel Dreman, Dreman Value Management, L.L.C. - Founder, Chairman, CIO & Chief Compliance Officer [12]

--------------------------------------------------------------------------------

Can you hear me better now?

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [13]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Yonah Weisz, Delek Group Ltd. - Head of IR [14]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

David Nasaniel Dreman, Dreman Value Management, L.L.C. - Founder, Chairman, CIO & Chief Compliance Officer [15]

--------------------------------------------------------------------------------

Okay. How much cash flow can Delek expect from Leviathan in 2020 using the updated volumes under the new agreement?

--------------------------------------------------------------------------------

Unidentified Company Representative, [16]

--------------------------------------------------------------------------------

Yes. There are two answers to this question. The ongoing cash flow that Leviathan will produce, this is one aspect and Asaf Bartfeld will say around 10 BCM. So we're talking about total revenues for -- in Leviathan of around $2 billion per year, which our portion out of the revenue before OpEx and CapEx is 45%. So this is one aspect. But one of the things that we believe that we will see in 2020 is the refinance of Leviathan. Delek clearly took a bridge loan in order to finance the development plan of Leviathan. Now that Leviathan is ready and first gas will start in the next coming days, we believe that the next step for Leviathan will be -- or for Delek Drilling is to refinance [the dig], and we believe that we can achieve a larger amount of facility comparing to the bridge loan or the loan, the facility that we took for the development. And [the taxes] potentially can be distributed also as dividend. I think that on this specific item, one, we feel very comfortable that we will get -- we haven't published the number, but a nice -- we will see very nice cash flow from Delek Drilling. And I think that in order to be familiar with the number or for us to be told the numbers, we will need to wait for the annual report, and we will give more clarity around what the cash flow that we're expecting to see from both -- these both channels, the ongoing -- the cash flow from Leviathan and the refinance.

--------------------------------------------------------------------------------

David Nasaniel Dreman, Dreman Value Management, L.L.C. - Founder, Chairman, CIO & Chief Compliance Officer [17]

--------------------------------------------------------------------------------

Great. That's very helpful. With regard to the sale of Tamar, is there a deadline for that? And what other options are you looking at to get this deal done?

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [18]

--------------------------------------------------------------------------------

Yes. There is a deadline. Is it 2021?

--------------------------------------------------------------------------------

Yonah Weisz, Delek Group Ltd. - Head of IR [19]

--------------------------------------------------------------------------------

December 2021.

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [20]

--------------------------------------------------------------------------------

December 2021. The Delek Group will be obligated to sell all the shares or rights in Tamar. There are a few options. One, of course, to sell 22% still remain in Delek Drilling. And one of the ideas was published by Delek Drilling mainly to split between Leviathan and Tamar, and there will be a public dividend partnership by the name of Tamar. On this case, we can sell -- we only sell shares of this partnership. But we see it's relatively premature. We have more than 2 years. So we'll wait.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

The next question is from Cath Hunter of IHS Markit.

--------------------------------------------------------------------------------

Catherine Hunter, [22]

--------------------------------------------------------------------------------

Can you hear me?

--------------------------------------------------------------------------------

Yonah Weisz, Delek Group Ltd. - Head of IR [23]

--------------------------------------------------------------------------------

Can you speak a bit louder?

--------------------------------------------------------------------------------

Catherine Hunter, [24]

--------------------------------------------------------------------------------

Yes. Sure. Can you hear me now? Better?

--------------------------------------------------------------------------------

Yonah Weisz, Delek Group Ltd. - Head of IR [25]

--------------------------------------------------------------------------------

Fair enough.

--------------------------------------------------------------------------------

Catherine Hunter, [26]

--------------------------------------------------------------------------------

Great. It's really -- I wanted to focus in on Dolphinus arrangement and do you sell gas to Egypt? It looks like you've got at least 2 further approvals still to come from the Petroleum Commissioner and from the tax authority. So I just wanted to understand where you are with that. And then the second question is really about Egypt demand. We're seeing at the moment that Egypt's shutting in some of its own production due to overcapacity. Do you see any risks to the volumes, particularly when you start to ramp up those volumes from the end of June 2020?

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [27]

--------------------------------------------------------------------------------

Okay. So the answer for the first question is, just seem to take -- we are calling technical approval by the tax authority and another one, we believe that we will get it in the next coming days or weeks. So we don't see any problem. It's much more technically than really an issue. And about the second question, I don't have before all the demand for the Egypt market, but I'm speaking out from my memory, we don't see any problem with the demand because still there is demand in Egypt, the local market and of course, 2 LNG plants that are not working at all. So we believe the demand for Israeli natural gas will be -- [or Cyprus as soon] we develop the field. We bid there and we don't think there is any danger for the volumes. Hello?

--------------------------------------------------------------------------------

Yonah Weisz, Delek Group Ltd. - Head of IR [28]

--------------------------------------------------------------------------------

Has that answered your question?

--------------------------------------------------------------------------------

Catherine Hunter, [29]

--------------------------------------------------------------------------------

I guess for the Egypt part, I mean Egypt's shutting its own production at the moment because there is lack of demand and because it's not economic to sell to the European market in the form of spot LNG. So there are challenges with too much availability, at least, for the next year or so. I guess that was the context of my question.

--------------------------------------------------------------------------------

Yonah Weisz, Delek Group Ltd. - Head of IR [30]

--------------------------------------------------------------------------------

Exactly so. And if I just point out the question, you're -- time frame you're looking at is more or less in the short term. It's a very long-term agreement. And therefore, over the space of a decade or 2, we do believe that there is plenty of room within the Egyptian LNG mix for Israeli imports.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

The next question is from [Robert Bree].

--------------------------------------------------------------------------------

Unidentified Analyst, [32]

--------------------------------------------------------------------------------

It seems to me that if you've taken over this Ithaca Energy and you're looking for equity participation from other people or for an IPO that you possibly have taken on more than you can handle also in an energy environment now where there is a glut of oil and specifically natural gas, I find that pretty threatening. I would like to know what type of an agreement you do have with Egypt and Jordan? Is -- what you're going to get for your natural gas based on a long-term contract, like the Russians just did with the Chinese? Or is it going to be market prices? In short, I think you have a lot of challenges ahead selling your natural gas to people that really have no allegiance to Israel, to say the least. And I feel in the short run, you have a tremendous amount of economic challenges coming forward.

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [33]

--------------------------------------------------------------------------------

It was a statement. What's the question?

--------------------------------------------------------------------------------

Unidentified Analyst, [34]

--------------------------------------------------------------------------------

The question was, do you consider yourself overleveraged in a very poor environment for oil and natural gas?

--------------------------------------------------------------------------------

Idan Wallace, Delek Group Ltd. - Deputy CEO & Executive VP [35]

--------------------------------------------------------------------------------

Yes. It's Idan Wallace, Deputy CEO of Delek. I must tell you that I disagree with some of the comments that you've raised, particularly, in the fact that as far as we see the strategic acquisition, transaction that we did through Ithaca with Chevron, is something very substantial, important and crucial as far as Delek consider it and as far as we see it in the long run and also in the short run. And I'll explain. By purchasing the Chevron assets that we've just completed the transaction, basically, what Delek did is becoming and placing itself, transforming itself, as an international global player in the energy sector. We've become, if I'm not mistaken, the second independent player in the North Sea and one of the big 5 companies operating in the North Sea. This is exactly -- this is synergetic to our activity in Israel because, let's bear in mind that in Israel, what we have is our interest in Leviathan. Of course, we have the interest in Tamar as well that we need to sell in the next 2 years. And on the other hand, we wanted to develop a very important and key assets investments globally in order to put ourselves in the global market. Now let's remember that we are talking about income-producing assets. Let's remember the asset that we've -- the asset that we purchased. Let's remember that we are talking about substantial and strong cash flow that is going to be generated from this operation. So as far as we see it, a, this is not something that we consider that's overleveraged, as you've mentioned. We see this as a strategic transaction that we've done, that it's going to influence positively, tremendously, in -- for Ithaca and also for the Delek Group.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Ladies and gentlemen, it seems the questioner has disconnected. (Operator Instructions) There are no further questions at this time. Before I hand over the call to Mr. Bartfeld 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. Bartfeld, would you like to make your concluding statements?

--------------------------------------------------------------------------------

Asaf Joseph Bartfeld, Delek Group Ltd. - CEO & President [37]

--------------------------------------------------------------------------------

Yes. Thank you very much. I would like to thank, again, everyone, who was on the line. There was a lot of people I see. And of course, if anyone has any question, don't hesitate to call us, and we'll answer any questions. Thank you very much, and have a good day and happy holidays if you are celebrating. Thank you.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

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