For All His Natural Gas, Tshuva Still Needs the Institutionals

Lior Zeno
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Lior Zeno

Delek Group’s natural gas partnerships will try to raise some $250 million on Israel’s capital markets in the coming months to finance development of its offshore gas fields, even though the Israel Electric Corporation agreed this week to purchase gas from Delek’s Tamar field for an estimated $8 billion to $16 billion over 15 years.

On Tuesday, the Avner Oil Exploration and Delek Drilling limited partnerships received approval for the planned 2012 offerings from their general shareholders meetings. But the announcement generated an uproar, at least in readers’ comments on news websites. The reason: Financially-strapped Delek Real Estate, also controlled by Delek Group and Yitzhak Tshuva, is in the meantime defaulting on about half the debt it owes to bondholders.

Certain institutionals had declared during negotiations over Delek Real Estate’s settlement that if Tshuva didn’t sufficiently cover the debts, they would punish him by not participating in public offerings by his other companies. But when his gas companies, which hold large chunks of the Tamar discovery, announced the anticipated offering, most of these institutionals clammed up: Tamar, after all, is expected to supply Israel’s gas needs for the next 20 years.

“What do you mean when you ask what we think about Tshuva’s gas partnerships’ expected offering?” asked a senior official at one institutional. “They can only do a rights issue,” since they are partnerships rather than limited liability companies. “And if we don’t participate, we’ll lose our stake in the gas.”

Although limited partnerships enjoy certain benefits, they are also subject to several restrictions, such as not being allowed to issue bonds directly. The senior official thus assumed that Avner and Delek Drilling would raise money through a warrants issue, which allows existing partnership unit holders to purchase additional units to maintain their original share in the partnership. An institutional that refused to participate in such an issue would see its piece of the pie shrink, while the stake held by the controlling owner, Tshuva, would expand, as he would presumably put up the balance.

This would thus lead to the opposite of what the institutionals wanted to achieve: Instead of punishing Tshuva and denying him their money, their lack of participation would benefit him by increasing his share of the gas.

But is the institutional player correct? Apparently not. Even Tshuva’s energy arm, awash with natural gas discoveries, needs Israel’s capital market more than it needs him.

Back to the beginning: The financial fortunes of Delek Drilling and Avner changed in 2004, when natural gas began flowing from the Mari-B field near Ashkelon’s coastline.

But that field will be depleted within several months, and the two companies require enormous sums over the next two years for several projects: building infrastructure for delivering gas from Tamar, which will cost Delek Drilling and Avner about $1 billion (some of which has already been transferred); developing the relatively small Noa gas field near Ashkelon’s coast over the coming months, at a cost of about $100 million; possible development of the huge Leviathan field, where gas was discovered last year, as well as the Aphrodite field near Cyprus; and exploratory drilling in the Mediterranean Sea at a cost that could reach $240 million, assuming a cost of $100 million per drilling.

But even with the guaranteed future cash flow from Tamar, which Delek hopes will start flowing by early next year, the group isn’t on easy street. Israel’s banks aren’t participating in the financing, due to a rule that says a bank can’t lend over 15% of its capital to a single borrower. And loans from foreign banks are difficult to obtain because of Europe’s liquidity crisis. Yet Tamar’s continued development, which burns up about $100 million each month, requires readily available funds.

Cash flow from energy projects begins only after most of the investment has been completed and the pipelines have been built. And about $430 million in bridge loans provided by Barclays Capital and HSBC in 2010, which come due in June, aren’t enough to cover the companies’ current expenses.

The urgent need for new funding arose because last month, the Energy and Water Resources Ministry’s Oil Council refused to allow the companies to borrow an additional $500 million from HSBC by using Leviathan’s gas reserves as collateral.

he Oil Council claimed that the funding from HSBC, primarily for developing Tamar and other exploratory licenses, could have an adverse effect on future competition with gas from Leviathan. Its decision torpedoed the deal, sending Delek’s gas companies scrambling for fresh sources of cash.

Meanwhile, the two partnerships’ parent company, Delek Energy Systems, has been providing them with short-term owner’s loans every few months. The decision that shareholders approved on Tuesday was to expand the approved framework of the offerings from $70 million for each limited partnership to $125 million each.

Bond offering: Just a bit of extra effort

So what other money-raising options remain for Avner and Delek Drilling in the local capital market?

The fact that the partnerships can’t currently issue bonds using a regular shelf prospectus doesn’t mean they couldn’t do so with a bit of effort. Indeed, they have done so before. Perhaps for this reason, the decision approved by shareholders specifically stated that the offering might be made through either participation units or bonds.

Gas exploration partnerships have asked the Israel Securities Authority in the past to allow them to issue bonds. The authority is still examining the issue, but even if it doesn’t give its approval, the partnerships have other options.

In March 2005, Delek Drilling and Avner sold bonds to U.S. institutionals to finance the Tethys Sea project. To circumvent the ISA restrictions, they established a special-purpose company owned by the Tethys Sea partners in identical proportions and issued dollar-denominated bonds.

Last April, the Israel Tax Authority approved the partnerships’ use of a limited company to obtain up to $30 million in loans from foreign banks.

Most likely, the upcoming offering will be done through an issue of warrants. But even so, a situation in which other investors declined to participate and thereby increased Tshuva’s share wouldn’t be optimal for him. Increasing his share in the partnerships would mean greater participation in funding the drilling and other projects, amounting to hundreds of million of dollars a year. That kind of investment is problematic for any one person, regardless of how rich he is.

All in all, Tshuva and Delek still need Israel’s institutionals. And that is especially true during these financially tight times, when the global crisis is causing large institutions to exercise extra caution in financing.