deep-sea rig at Tamar
The deep-sea rig at Tamar, off the Haifa shoreline.
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Leader Capital Markets’ equity analysts are smiling on Israel’s natural gas exploration and production sector as Egypt erupts in violence.

“The risk premium associated with Egypt and the increase in the price of coal, and in the excise tax rate, will lift the price of Israeli natural gas,” wrote analyst Eran Levy of Leader’s equity research division.

He also recalculated the estimated value of Tamar’s deep-sea reserves of natural gas, and accordingly revisited his valuations of the Israeli companies involved in developing the site: Isramco ‏(28.7%‏), Delek Drilling ‏(15.6%‏), Avner ‏(15.6%‏), Alon Gas Exploration ‏(4.1%‏) and the general partners, including Cohen Development ‏(a unit of Delek Group‏), which controls Avner, and Delek Energy, which controls Delek Drilling.

Levy postulates that Delek Energy, Delek Drilling and Avner, all three members of Yitzhak Tshuva’s Delek Group of companies, are fully priced. His recommendation for the three is Market Perform.

On the other hand, he suggests that Isramco, Cohen Development and Alon Gas Exploration are undervalued. His investment recommendation for all three is Buy.

Levy’s 12-month price target for Isramco is 14% above the exploration company’s share price, while his target for Cohen Development is 18% above its level on the Tel Aviv Stock Exchange on Wednesday morning.

But Alon Gas Exploration takes the cake, with a target 67% above its level on the TASE at Wednesday’s opening.

The risk rises

“The increase in the risk premium because of the events in Egypt weakened the level of competition,” Levy explained. Egyptian gas has become less attractive as an investment prospect.

Meanwhile, the considerable increase in the price of coal, and the excise tax hike in Israel, can be expected to sharply increase the price of alternatives to natural gas.

However, as the alternatives to gas increase in price, that in turn is likely to jack up the price of Israel’s natural gas in the long-term contracts slated to be signed between the Tamar partners and heavy-duty customers like the Israel Electric Corporation, the Israel Corporation and Israel Chemicals, Levy explained. The Tamar partners will be in a better position to demand a higher price.

Because of that, and because gas sector shares in general and the Tamar partners in particular had been undervalued in Leader’s last report, Levy thought it apt to upgrade Isramco, Alon Gas Exploration and Cohen Development to Buy and to raise his targets for the three.

Of course, there’s no telling what will happen next in the Middle East, Levy admitted, but he feels one thing can be said with a high degree of assurance: “Even if the situation in Egypt substantially improves, the events of the last week increased the risk premium of Egyptian natural gas, weakened the competition with Israeli gas suppliers and will substantially increase the premium and price of natural gas in Israel.” The timing for the Tamar partners couldn’t be better, he noted.

The Tamar field of gas was officially declared a discovery in 2009. It is located 1,700 meters below sea level and has been drilled to a depth of nearly five kilometers. The site is believed to contain about 207 billion cubic meters of gas, enough to supply Israel’s needs for decades. The site operator is the U.S. company Noble Energy.

Chilly peace

The Israel Electric Corporation has an option to expand its contract to buy natural gas from the Egyptian company EMG, which buys the gas for Israel from the Egyptian government, and in which the Israeli businessman Yossi Maiman owns an interest through Ampal American. However, Levy postulated that the chance of IEC exercising its option has diminished following the unrest in Egypt.

The state of the peace between Jerusalem and Cairo has been icy for years. But since the social upheavals began, the fundamentalist Muslim Brotherhood has reportedly been calling on Cairo to halt the gas supply to Israel and prepare for war against Israel. Little wonder Levy postulated that the IEC, which has a monopoly over electricity production and supply in Israel, might be wary of committing to increase its dependence on an Egyptian source. But as he said himself, there’s no telling what will happen in the Middle East.

Meanwhile, for all the trouble, the supply of gas from Egypt hasn’t stopped or even been disrupted by the events. Of course, that could change if elements hostile to Israel topple Hosni Mubarak’s administration and take control. As Levy wrote, “Given that the supply of gas to Israel is anchored in the peace agreements between the two countries, we did not take into account a scenario of the gas supply from Egypt to Israel coming to a halt.”