Delek : Leviathan Overriding Royalty Ltd Bond Rating

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Delek Leviathan Overriding Royalty Ltd - Bond Rating

Tel Aviv, November 5, 2020. Delek Group (TASE: DLEKG, US ADR: DGRLY) ("the Company") announces that further to what is stated in the Company's Immediate Reports dated October 8, 2020 (ref. no. 2020-01-109698),October 19, 2020 (ref. no. 2020-01-113586),October 25, 2020 (ref. no. 2020-01-115590) and October 28, 2020 (ref. no. 2020-01-117066)concerning a bond offering to qualified investors secured by overriding royalties from the Leviathan Project, on November 4, 2020 Fitch Ratings published a B+ international rating for the bonds of Delek Leviathan Overriding Royalty Ltd ("Delek Royalty"), a 100% indirectly wholly-ownedsubsidiary of the Company. The bonds were offered to foreign and Israeli qualified investors at a par value of USD 180 million and secured by a lien on the overriding royalties of the share of Delek Drilling Limited Partnership in the Leviathan Project, which were transferred to Delek Royalty from the Company and from Delek Energy Systems Ltd.

Attached as an Appendix to this Report is the full rating published by Fitch Rating.

This is a convenience translation of the original HEBREW immediate report issued to the Tel Aviv Stock Exchange by the Company on November 5, 2020.

About The Delek Group

Delek Group is an independent E&P company with activities in the UK North Sea and the East Mediterranean. Delek Group has significant holdings in the Leviathan and Tamar natural gas reservoirs in the East Mediterranean (Israel's territorial water), with reserves and resources of more than 30 TCF and annual production capacity of more than 20 BCM. These reservoirs are a major natural gas supplier to the growing markets of Israel, Egypt and Jordan and Delek continues to lead the region's development into a major natural gas export hub. Through its wholly owned subsidiary Ithaca, Delek Group holds high-quality oil and natural gas assets in the UK North Sea totaling approximately 260 million barrels of oil equivalent (boe) and producing about 25 million boe per year. Delek Group is one of Israel's largest and most prominent companies with a consistent track record of growth. Its shares are traded on the Tel Aviv Stock Exchange (DLEKG:IT) And its ADRs are traded on the US OTC market (DGRLY:US).

For more information on Delek Group please visit www.delek-group.com

Contact

Investors

Limor Gruber

Head of Investor Relations

Delek Group Ltd.

Tel: [phone]

[e-mail]

11/4/2020

Fitch Assigns Delek Overriding Royalty Leviathan Ltd's Bond 'B+' Rating; Stable Outlook

RATING ACTION COMMENTARY

Fitch Assigns Delek Overriding

Royalty Leviathan Ltd's Bond

'B+' Rating; Stable Outlook

Wed 04 Nov, 2020 - 11:05 AM ET

Fitch Ratings - London - 04 Nov 2020: Fitch Ratings has assigned Delek Overriding Royalty Leviathan Ltd's (the issuer) USD180 million bond a 'B+' rating.

RATING RATIONALE

The issuer's credit profile is driven by the rating of the Leviathan gas field, a large offshore gas field in Israel that pays royalties to the issuer. The rating considers the issuer's exposure to refinancing risk, given the high initial leverage as well as the uncertainty on the timing of the royalty rate step-up, which is linked to the Leviathan gas field production.

The rating factors in the seniority of royalty payments in the Leviathan gas field's cash flow waterfall as well as the stable cash flow generation supported by the high-quality reserves, the use of commercially proven technology and the strong operating setup with Noble Energy Mediterranean Ltd providing day-to-day operating services.

KEY RATING DRIVERS

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11/4/2020

Fitch Assigns Delek Overriding Royalty Leviathan Ltd's Bond 'B+' Rating; Stable Outlook

Lower-rated Counterparties, Diversified Offtake Base: Revenue Risk - Midrange

The issuer benefits from the payment of overriding royalties (ORRI), which rank senior to operating costs and debt service on the bond issued by Leviathan Bond Ltd. However, the increase in the royalty rate from 1.5% to 6.5% at the well head (1.38% to 5.98% expected effective rate at the entry to the grid) will be linked to the timing of the full recovery of the Leviathan gas field investment (return on investment; ROI) and this limits the visibility of project cash flow generation over the medium term.

Under the Fitch Base Case, the ROI date is in 2025, while under the Fitch Rating Case, which assumes lower revenues in line with the 1P production forecast, it is in 2027, highlighting that the ORRI payment depends on the timing of revenue generation of the gas field.

The Leviathan gas field benefits from a diversified offtake structure with long-term contracts with offtakers in Jordan and Egypt as well as a large pool of companies in Israel. The export volumes make up the majority of Leviathan's gas sales and imply a reliance on the offtakers in Jordan and Egypt to perform on their payment obligations.

The Leviathan gas field's 15-year gas sales and purchase agreement (GSPA) with the Jordanian NEPCO is for an annual contracted quantity of 3.1-3.6 billion cubic metres (BCM). NEPCO is the national electricity company of the Hashemite Kingdom of Jordan (BB-/Negative) and is wholly owned by the Jordanian government. NEPCO is the sole carrier of electric power in the country.

We view Leviathan's gas as strategically important to Jordan as the country does not have any domestic sources of energy other than renewables and is otherwise reliant on the import of relatively expensive LNG. Leviathan's piped natural gas is therefore important to the country's economic development, which is reflected in the government guarantee of NEPCO's obligations to the Leviathan sponsors.

The Leviathan gas field also has a 15-year GSPA in place with Blue Ocean for the export of up to 4.7BCM per year to Egypt. Blue Ocean is the local marketing company that acts as the intermediary between Leviathan and the ultimate offtaker, the Egyptian Natural Gas Holding Company (EGAS, NR). The GSPA expressly allows for the export of Leviathan gas as LNG in addition to domestic use. This provides a strong incentive for Egypt to make full use of the contractual volumes even as it develops its domestic gas fields in the Eastern Mediterranean.

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11/4/2020

Fitch Assigns Delek Overriding Royalty Leviathan Ltd's Bond 'B+' Rating; Stable Outlook

Furthermore, East GAS together with Delek Drilling and Noble Energy acquired a 39% stake in the Eastern Mediterranean Gas Pipeline (EMG), which also gives it the exclusive right to transport gas through the EMG from Israel to Egypt. This demonstrates Egypt's intention to maintain a long-term relationship with Leviathan.

We view the Israeli GSPAs as systemic in nature as the gas supply in Israel is limited to Tamar and Leviathan currently and Karish/Tannin from 2021. Gas demand from the Israeli economy is forecast to grow significantly in the medium term with the gasification of the transport system and replacement of coal-fired power plants.

The Leviathan gas field's volume risk is limited through the long-term nature of most offtake contracts and the take-or-pay requirements under the GSPAs. The contracts also allow for additional sales in excess of contractual volumes if Leviathan has capacity to meet nominations.

The gas sales prices are based on various pricing formulas including linkages to the electricity production tariff determined by the Public Utility Authority-Electricity for most GSPAs in Israel and the Brent barrel price for the NEPCO and Blue Ocean GSPAs. This exposes the project to price risk. However, this is limited by the provision of floor prices set in the individual contract.

Experienced Operator: Operating Risk - Midrange

The royalties rank super senior as they are paid before any operating expenditure. As a result, royalties are not directly exposed to cost volatility. Nevertheless, the issuer's bond holders are fully exposed to the operating performance of the Leviathan gas field.

The operation of gas & oil facilities is at the higher end of complexity within the infrastructure space, but the project benefits from the presence of Noble Energy as an experienced operator of gas fields in the Eastern Mediterranean region with demonstrated performance on Tamar and the Yam Thetys/Mari-B fields.

There is also a good alignment of interest with Delek Drilling through Noble Energy's participation as a partner in the Leviathan lease. Furthermore, the joint operating agreement clearly outlines the responsibilities of the parties.

The Leviathan gas field uses commercially proven technology and a relatively high level of equipment redundancy. The gas field further benefits from the lessons learned on Tamar which reduces outage risk.

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