UBS sticks by Ratio Oil Exploration on Leviathan gas-deal gains


UBS sticks by Ratio Oil Exploration on Leviathan gas-deal gains


HERZLIYA, Israel (Bloomberg) -- UBS AG is standing by its recommendation investors buy shares in Ratio Oil Exploration 1992 LP even after a delay in the proposed sale of a stake in Israel’s Leviathan gas field, the company’s most valuable asset.

The hitch probably won’t halt development of the field, as Ratio and its partners are likely to move ahead with securing export deals in the region, according to Roni Biron, a Herzliya, Israel-based analyst at UBS, who kept his 12-month price estimate for Ratio at 0.58 shekel. The shares fell 2.6% yesterday and traded 0.6% higher at 0.5 shekel at 1:20 p.m. in Tel Aviv today.

Woodside Petroleum Ltd. failed to meet a March 27 target for buying a stake in Leviathan for as much as $2.6 billion. The 2010 discovery of the field, then the world’s biggest in a decade, followed the nearby Tamar find. Israel expects the gas to both meet its needs for a quarter of a century and enable exports.

The Woodside news “is a set-back but not necessarily a game changer for Leviathan,” Biron said in a March 30 telephone interview. “The field’s development is not fully dependent on Woodside and the events underscore the importance of regional export opportunities.”

Ratio and its partners signed a $1.2 billion, 20-year deal with a Palestinian power plant in January in Israel’s first natural gas export agreement, before Tamar’s partners signed an accord with Jordan worth at least $500 million last month.

Talks with Leviathan partners are continuing, Perth-based Woodside said. Houston-based Noble Energy Inc. has a 39.66% stake in the field, while Delek Drilling-LP and Avner Oil Exploration LLP, units of Delek Group Ltd., have 22.67% each and Ratio holds 15%, according to a March 30 filing to the Tel Aviv bourse. Noble, Delek Drilling and Avner are partners in the Tamar gas field.

“Any positive development with Leviathan has the most impact on Ratio as its exposure to Leviathan is far bigger,” Biron said. “The main catalyst for the shares will be initial supply agreements which may materialize late this year and next year.”

There are talks for exports to Turkey and Egypt, according to Ratio’s March 19 financial statement.

Egypt’s Muslim Brotherhood government, hostile to doing business with Israel, was replaced in July with a military rule that has supported ties with the country. Turkey and Israel may renew diplomatic relations, suspended after Israeli commandos killed nine Turks in a May 2010 raid on a Gaza Strip-bound flotilla, Turkish Foreign Minister Ahmet Davutoglu said Feb. 10.

“The first significant contract with Egypt or Turkey could be a trigger for the shares,” David Shrem, a Tel Aviv-based energy analyst at Sphera Funds Management Ltd., which manages $600 million, said by phone March 30.

Ratio shares advanced 46% in the past 12 months as the government paved the way for gas exports. Noble estimates production of Leviathan will start in 2017, according to a December investor presentation. The benchmark TA-25 Index declined 0.3%.

Development of the field, which has an estimated 19 Tcf of natural gas, was pushed back by about a year, Noble’s Chief Executive Charles Davidson said on Nov. 21, following an “incredibly lengthy” process to set Israel’s natural gas export policy.

“If Woodside pulls out of the deal, then Ratio shares will drop sharply,” Shrem said. “It would lead to a longer and more complicated development process for Leviathan, especially from the financing point of view.”

The company has additional licenses offshore Israel, including the Neta and Roi licenses in which Italy’s Edison International SpA is a partner, according its March 19 statement.

“We are waiting to see how things progress and to get more details on the export plans,” Ella Fried, a senior analyst at Bank Leumi Le-Israel Ltd. said by phone March 30. She has a market perform rating on the partners, with a price target of 0.45 shekel for Ratio. “Once that picture becomes clearer, we may positively re-evaluate our rating and target price for the Israeli Leviathan partners,” she said.

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