Delek Drilling and Avner Mull Move to Foreign Stock Market and Merger

Transfer of both Delek Drilling and Avner Oil Exploration would likely involve initial public offering in London, New York or Hong Kong exchanges.

The Tel Aviv Stock Exchange is in danger of losing two of its largest drawing cards. TheMarker has learned that Delek Group is examining the possibility of transferring trading in its two limited energy exploration partnerships overseas to the London, New York or Hong Kong stock exchange.

The transfer of both Delek Drilling and Avner Oil Exploration would likely involve an initial public offering at one of these exchanges. Both companies number among the largest on the TASE in terms of trading turnover and market capitalization.

Delek Group, controlled by Yitzhak Tshuva, has been deliberating over the past several weeks on the various options and meeting with a number of foreign investment banks. The preferred option being formulated is merging Delek Drilling and Avner and performing an IPO in London for the combined company a technically complex procedure that hasn’t yet been completely worked out. Following the IPO, Delek might make an offer to exchange Israeli-held shares for those to be traded on the designated foreign stock market.

Bloomberg

Another option is “passporting” the shares from the TASE to another market. “This is a procedure that’s never been tried,” explained an expert on international securities law. “Israeli law received recognition by the European Securities and Markets Authority for adequate level of disclosure the initial requirement for passporting. The process has been recognized by the ESMA and British authorities, but not by Britain’s local stock markets. It has to be understood that this entire matter is virgin territory. The authorities and stock markets, both here and there, need to be approached to determine what is relevant.”

Sources familiar with developments note several factors motivating Delek’s interest in making the move. One is access to international funding sources. The companies are currently struggling with project financing, and a foreign IPO could provide financing that is not specifically project-oriented, for the company itself. Additionally, regulation in those stock exchanges is much less severe than in Israel.
Another reason is the desire to maximize the company’s asset value. In London and New York, for example, energy company ratios reflect 75% to 80% of their net asset values, while in Israel limited partnerships trade in the range of just 40% to 50% of their net values.

Delek Drilling and Avner have stakes in all of Israel’s natural gas discoveries. Each owns 23%-25% of the fast-depleting Tethys Sea reserves, 15.6% of the Tamar field expected to supply Israel’s fuel needs for at least 15 years beginning early next year, 22.5% of the enormous Leviathan gas reservoir, which will likely be directed toward export, and 15% of Cyprus’s Aphrodite discovery as well.

The two companies partner with U.S.-based Noble Energy in all these gas fields, and together are considering bringing in another large strategic partner within the next six months. This could probably occur in tandem with the move in partnership shares trading.

In recent years Delek Group’s natural gas activities have become its main driver, especially with Delek Real Estate’s collapse and Delek Israel’s shrinking marketing margins. Delek Drilling’s market value is NIS 8.2 billion and Avner’s is NIS 8.9 billion, with a combined value totaling about $4.5 billion. Delek is hoping it can realize an immediate upside on existing assets through an IPO.

Delek Group has been working for several months on a long-term strategic plan that would include the establishment of a pipeline company to take control of the transport of natural gas from the wells, selling off foreign energy activities, and trying to delist Delek Energy Systems the parent company of Delek Drilling and Avner from trading on the TASE.