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The erection of the Tethys Sea offshore natural gas production facility opposite the shores of Ashkelon two weeks ago, together with the upcoming round of financing, has boosted the value of participation units in Delek Drilling, Delek Energy and Avner Oil Exploration by over 30 percent in the past month.

A little over a month ago, the Delek Group, controlled by Yitzhak Tshuva, published an economic evaluation of the group, prepared by Yacov Sheinin's Economic Models firm. Sheinin set Delek's economic value at NIS 4 billion. The market value of the company at the time was 34 percent lower than this evaluation, and stood at NIS 2.9 billion. The evaluation report explained that one of the main reasons for the anticipated trebling of the Delek Group's operating profits within 10 years would be the commencement of sales from the Tethys Sea natural gas project and its transition to profitability.

The Tethys Sea partnership, in which Delek has a 30-percent stake, is due to begin providing the Israel Electric Corporation (IEC) with gas from the Mari gas reserve within six months. Tethys Sea has signed a $1.5 billion agreement to supply the IEC with gas for the next 10 years.

Sheinin expects the Tethys Sea project to be a growth engine for Delek in the next few years. In his report, Sheinin notes the fact that till now, Delek's gas exploration operations have only burdened the group with expenses; but adds that the Tethys Sea project is now the group's largest profit-making asset for the future.

The market's response was surprising: Immediately after publication of the complimentary report, Delek stock plummeted 25 percent. It's shares are currently trading at a 45-percent discount compared to the evaluation, giving the company a market value of just NIS 2.2 billion.

While Delek's share was nosediving, however, Delek Group's share price shot up and participation units in the oil exploration companies controlled by the group - Avner, Delek Energy and Delek Drillings - rose by 25-37 percent.

Apparently some of the investors who heard about the profits buried in the new energy source preferred to sell their shares in the holding company and buy those of the subsidiaries, which hold 57 percent of the shares in Tethys Sea. The American drilling company, Samedan, owns 47 percent of the shares and is in charge of setting up and managing the project. Something else that attracted investors to the Delek Group shares was a report by Delek regarding the successful erection of the gas production platform over the drilling site.

Delek is currently preparing a Tethys Sea bond issue to raise NIS 60-100 million. The issue's structure has yet to be finalized, but it has been announced that the issue will be led by the Leumi, IBI and Gmul underwriting companies.

"What is happening here is a revolution in Israel's energy economy," says Gabi Last, managing director of the Delek Group. "If this had happened in the era when we were children, there would have been a holiday so that we could go out into the streets waving flags."

Last cannot hide his excitement at the successful erection of the production platform, which is 400 meters (1,300 feet) high and weighs 22,000 tons. Last relates that the tugboat that pulled the platform from Houston, Texas, to Ashkelon was ordered two years in advance. Some $300 million was invested in the project and Tethys Sea's total investment in oil exploration and production has reached $500 million.

Now the production facility has to be connected to the gas wells and the pipeline to the beach must be laid - an operation that will take about six months.

Oil and gas exploration have always fueled men's dreams, but the many unsuccessful drillings only served to disappoint the investors who lost vast sums - until about two years ago, when commercial quantities of gas reserves were discovered off the coast of Ashkelon. The discovery of the gas by the Tethys Sea partnership happened at precisely the point when the government decided to vary its sources of electricity production to include gas.

Chen Herzog of Economic Models, which will closely follow the upcoming bond issue, says that now everyone agrees that gas is a preferred energy source to coal because it is much more environmentally friendly and costs the same. At this stage, gas will replace diesel and crude oil for electricity production, and the coal-fired power plants will continue to use coal.

The IEC's contract with Tethys Sea is for the purchase of 18 billion cubic meters (BCM) of gas over 10 years, for $150-180 million per year, starting in 2004. Herzog says that there are about 40 BCM of gas in the Tethys Sea reserves and that demand for the gas will exceed the IEC's contract. Tethys Sea will also sell gas to private electricity producers and to a facility to be built by Delek to produce electricity for a desalination project. Herzog estimates that Tethys Sea's reserves will provide enough gas for about 15 years of production.

The first plants that the IEC will convert for the production of electricity with gas are Reading, Gezer and Ramat Hovav, which will be ready by 2004. The IEC is investing about $1 billion in the conversions. An energy industry source told Ha'aretz that the only hardship anticipated due to the upcoming bond issue is the lowering of the IEC's credit rating by Moody's because the conversion project is based on the IEC's cash flow.

Sources at Delek are not worried about the lowering of the credit rating and do not anticipate any damage in the wake of the issue. The sources note that the IEC will save up to $150 million annually from the production of electricity using natural gas, so the project will actually strengthen the company. "The market knows how to evaluate the strength of the IEC and its ability to meet agreements," say the sources.

Since Tshuva acquired control over the Delek Group via bank credit, a few strategic changes have been made, including the increase of Delek's holdings in oil and gas exploration operations, Delek's entry into the real estate and energy assets market overseas and the acquisition of the Gal Shoham fuel company. Delek has also disbursed over NIS 1 billion in dividends. The expansion of the company's operations and the disbursement of the dividend have increased the company's financial leverage and its debt burden.

Delek's net debt swelled from NIS 350 million in 1998 to over NIS 5.7 billion in 2002, while its equity dropped from NIS 1.4 billion to NIS 1.1 billion. Delek's leverage rose from 20 percent before the dividend in 1998 to 83 percent in 2002. Sheinin explains that this high leverage increases the risk factor in the company's ability to repay its debt, but also enables Delek to achieve a high yield on its equity, which reached about 15 percent in 2002.