Delek Royalties, a newly formed company, filed a draft prospectus on Monday for an initial public offering of shares and bonds that will be used to buy rights to royalties in the Tamar gas field for some 700 million shekels ($198 million).
The move is the latest by tycoon Yitzhak Tshuva to divest his stake in the field, Israel’s second-biggest after Leviathan, by a government-mandated deadline of 2020. It follows Tamar Petroleum, another special purpose vehicle Tshuva formed that went public last July and holds 16.75% of Tamar.
Delek Royalties will be structured differently from Tamar Petroleum. The IPO proceeds from Delek Royalties will be used to buy so-called overriding royalties that entitle the holder to a fixed share of Tamar revenues.
Delek Drilling, the Tshuva company that holds the Delek Group’s Tamar stake, has been paying parent company Delek Energy its royalties.
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Those have risen to 4.75% of the field’s revenues since the Tamar partners recouped their initial investment to develop it at the start of this year. That is a significant share and could add up to 5 billion shekels over the life of the field, according to Delek Drilling.
Shares of Delek Drilling finished down 1.8% at 10.30 shekels on Monday.
Delek Energy is entitled to 75% of the royalties while its parent company, Delek Group, gets the remainder. The IPO only is for the Delek Energy’s portion; Tshuva is angling to sell the small portion doing to Delek Group to an institutional or other investor.
The valuation of Delek Royalties in the IPO will depend on investor demand for the shares. In the event it is tepid, Delek Energy is likely to step in and buy some of them to ensure that it gets the price it is seeking. In the prospectus, however, it commits itself to not exercise voting rights in excess of 12% of the company, even if its holding is bigger.
The bond component, which will seek to raise 475 million shekels, has already received an A1 rating from the Midroog rating agency. If Delek gets the valuation it is hoping for, the shares, Delek Royalties will be 65-70% leveraged.
Delek Royalties’ valuation depends on an optimistic cash flow forecast provided by Delek Drilling. Among other things it assumes consistent high demand for natural gas in the domestic market as well as exports to Egypt, after the Tamar partners signed a preliminary deal with the Egyptian company Dolphinus in February, and a gradual rise in oil prices to $90 a barrel from $73 today.
Delek Drilling is also more optimistic than the other partners in Tamar about how much gas prices will fall when they sign a new contract with Israel Electric Corporation, the field’s main customer, in 2021.