How a 735% jump in a stock in one day creates a valuation test
This month, Delek Group distributed to its shareholders, as a dividend in kind, the shares of its subsidiary (100%) Delek Yezum. The only asset of Delek Yezum is the right to receive overriding royalties from the revenues of NewMed Energy from the Leviathan reservoir.
This month, Delek Group distributed to its shareholders, as a dividend in kind, the shares of its subsidiary (100%) Delek Yezum. The only asset of Delek Yezum is the right to receive overriding royalties from the revenues of NewMed Energy from the Leviathan reservoir. Apparently, this is a specific corporate move, but in practice, it provides an opportunity to examine some of the most interesting and challenging issues in the field of valuation: how to price a company whose entire activity is based on royalties, how to derive its value from the market value of similar companies, and what can be learned from a discounted cash flow (DCF) model? To answer these questions, it is first necessary to understand how the Leviathan reservoir works, what the overriding royalty mechanism is, and how the distribution of a dividend in kind affects investors and trading on the stock exchange.
The Leviathan reservoir is the largest natural gas reservoir discovered in Israel's economic waters. It was discovered in 2010, and commercial gas production from it began at the end of 2019. The reservoir is held by three partners: Chevron (40%), which serves as the reservoir operator, the NewMed Energy partnership (43%), a subsidiary of Delek Group, and Ratio (15%). In 2025, the reservoir produced about 10.9 BCM (billion cubic meters) of natural gas. Production was lower than full production capacity due to two temporary shutdowns — one during the 12-day war and the second for upgrade works at the production facilities. About 57% of gas sales were directed to Egypt, about 26% to Jordan, and only 17% to the Israeli market. The reservoir's revenues from the sale of natural gas and condensate in that year stood at about 2.23 billion dollars — with 98% of them stemming from the sale of natural gas. In 2026, the reservoir's production capacity rose to 14 BCM per year. At the same time, the partners are promoting another expansion plan, within which the production capacity is expected to grow to 21 BCM by the end of the decade. If the plan is completed as scheduled, the reservoir's revenues may reach about 4.5 billion dollars per year. Leviathan is the central asset of NewMed Energy and Ratio, and it is also the source of Delek Yezum's overriding royalties. Therefore, any attempt to estimate the value of Delek Yezum must begin with understanding the economic structure of the reservoir and the rights derived from it.
How were the overriding royalties born at all? Most oil and gas exploration in Israel was previously carried out through limited partnerships in which a general partner operates, responsible for the ongoing management of the partnership, alongside limited partners providing the capital. Already at the time of establishing the partnerships, it was determined that the partnership would pay overriding royalties to the general partner and other parties, in exchange for initiating the project, managing it, or transferring the rights. In those years, the gas exploration sector in Israel was considered particularly risky, and the chance of a commercial discovery was perceived as low. The discovery of the Yam Tethys reservoirs, and later Tamar, Leviathan, Karish, and Tanin, changed the picture and turned Israel into a significant gas producer. Accordingly, the economic value of the overriding royalty rights, which constitute a percentage of the revenues from gas sales after deducting some direct costs — a model known as "wellhead revenues" — also rose. Today, these costs stand at about 11.5% of the reservoir's revenues. In contrast, the rights holders in the reservoir also bear royalties to the state, development investments, and ongoing maintenance expenses. An overriding royalty owner does not participate in most of these costs, and therefore the economic value of 1% of an overriding royalty is higher than the value of 1% in direct ownership of the reservoir. This distinction is the cornerstone of the pricing model that will be presented later.
In a regular dividend distribution, the company transfers cash to its shareholders. A dividend in kind distribution works on the same principle, except that instead of cash, another asset is transferred to the shareholders — usually shares of a subsidiary. In the case of Delek Group, the right to receive overriding royalties from NewMed Energy's revenues from the Leviathan reservoir was first transferred to Delek Yezum. At the same time, the company took a bank loan of about 250 million dollars, and after offsetting balances against Delek Group, it was left with net financial liabilities of about 233 million dollars. After completing the move, Delek Group distributed all the shares of Delek Yezum to its shareholders as a dividend in kind. From the investors' perspective, a new public company was born, whose entire activity is based on receiving overriding royalties from the Leviathan reservoir.
One way: to look at Ratio
One of the ways to estimate the value of Delek Yezum is to rely on the way the capital market prices companies holding rights in the Leviathan reservoir. For if it is possible to derive from Ratio's market value the value that investors attribute to the entire reservoir, it is possible to estimate on its basis also the value of Delek Yezum. Ratio holds 15% of the Leviathan reservoir, however, its economic share in the reservoir is lower because it pays an overriding royalty. Today, the royalty rate stands at 6%, but after the completion of the development investment reimbursement, it is expected to rise to 8%. Since this point in time is already close, the calculation below is based on the future royalty rate. It is important to distinguish between direct holding in the reservoir and an overriding royalty. Economically, an overriding royalty is worth more than a direct holding because its owner enjoys part of the revenues but does not bear most of the development, maintenance, and royalty costs to the state, which currently stand at 11.06% of the reservoir's revenues. In this analysis, we estimate that this advantage increases the economic value of the overriding royalty by about 33% compared to a direct holding in Leviathan. This estimate relies mainly on two factors. The first is that the overriding royalty owner does not participate in paying royalties to the state. The second is that the royalty owner does not bear the capital investments required for expanding the reservoir, which in 2026-2029 are expected to exceed 2.5 billion dollars (about 16% of the estimated value of Leviathan). On the other hand, the overriding royalty owner also bears corporate tax and the Sheshinski levy. Therefore, the 33% ratio is not fixed, but reflects current economic conditions. As development investments are completed in the future, the gap between the value of an overriding royalty and the value of a direct holding is expected to narrow. In accordance with these assumptions, an overriding royalty of 8% is equivalent to a reduction of about 10.65% from the economic value of Ratio's share in the reservoir. Therefore, although Ratio holds 15% of the rights, its effective share in the economic value of Leviathan stands at about 13.4%. The market value of Ratio currently stands at about 1.6 billion dollars. After adding the excess financial liabilities, an activity value of about 2.058 billion dollars is obtained. If this value represents 13.4% of the economic value of the reservoir, one can derive from it a value of about 15.35 billion dollars for the entire Leviathan. From this value, one can also estimate Delek Yezum, which is entitled to an overriding royalty of 2.95% of the reservoir's revenues. Assuming that an overriding royalty is worth about 33% more than a direct holding, this right is equivalent to about 3.93% of the economic value of the reservoir, an amount of about 603 million dollars. After deducting net financial liabilities of about 233 million dollars, an equity value of about 370 million dollars (about 1.132 billion shekels) is obtained, or about 61.9 shekels per share — similar to the current market price of Delek Yezum. Almost all components of the calculation rely on market data or data published by the companies. The only significant assumption that cannot be observed directly is the ratio between the value of an overriding royalty and the value of a direct holding in the reservoir. Any change in this assumption will directly affect the calculated value.
Second way: to look at the flow
Another way to estimate the value of Delek Yezum is through a discounted cash flow model. This method is based on estimating the future cash flows expected to stem from the company's overriding royalties. The model relies on production forecasts, energy prices, investments, and expenses appearing in the resource report attached to the Delek Yezum prospectus. According to the company's best estimate, and assuming a discount rate of 7.5%, the discounted value of the overriding royalty flows amounts to about 640 million dollars. Like any DCF model, this valuation is particularly sensitive to the assumptions on which it is based. First, the model assumes that the price of Brent crude oil, to which part of the export products to Egypt and Jordan are linked, will rise over time. Any significant change in its price is expected to directly affect the reservoir's revenues and Delek Yezum's cash flows. Another central assumption is that the Leviathan reservoir will produce gas at a rate close to maximum production capacity, in accordance with the development plan. Production lower than planned, delays in infrastructure expansion, or a decrease in demand for export could reduce cash flows and accordingly also the value obtained from the model. In addition, the flow calculation attached to the prospectus does not include the management and general expenses of Delek Yezum. In our estimation, these expenses are expected to reduce the activity value by about 20 million dollars. After deducting this amount and the company's net financial liabilities, an equity value of about 387 million dollars is obtained, which is about 1.18 billion shekels, or about 64.6 shekels per share. This value is about 4% higher than the value obtained by the comparison method to Ratio. In our estimation, the gap stems mainly from the relatively optimistic assumptions embedded in the DCF model. Although they rely on completely different methodologies, both valuation methods lead to a similar value range of about 1.1-1.2 billion shekels for Delek Yezum. The fact that two independent approaches yield a similar result strengthens the probability that the valuation reasonably reflects its economic value, subject to the assumptions on which the models are based.
Beyond the valuation, the resource report provides a detailed picture of the cash flows expected over the life of the reservoir. According to the forecast, in 2027 Leviathan is expected to sell about 14.1 BCM of natural gas, and Delek Yezum's revenues from overriding royalties are expected to stand at about 73 million dollars. In the years following, revenues are expected to continue to grow, in parallel with the expansion of production capacity and sales. On the other hand, starting from 2028, the reservoir is expected to begin paying the Sheshinski levy, which will rise gradually until it reaches about 46.8% from 2031 onwards. During the next decade, the state's revenues from the Sheshinski levy alone from the Leviathan reservoir are expected to exceed 2 billion dollars per year. The value of Delek Yezum is derived almost entirely from the revenues of the Leviathan reservoir. Therefore, the factors that will affect the company's share price are first and foremost those that will affect the volume of revenues and profitability of the reservoir. In recent years, the demand for gas from the Leviathan reservoir has grown, mainly from Egypt. Export agreements do include obligations to purchase minimum quantities, but in practice, demand has exceeded the levels set in the contracts, this is mainly due to the shortage of natural gas in Egypt, alongside the use it makes of LNG liquefaction facilities for export to international markets. As long as these conditions continue, it is likely that the Leviathan reservoir will continue to operate at high utilization, in a way that will support growth in the reservoir's revenues and Delek Yezum's overriding royalties. However, a significant decrease in gas prices in Europe or a change in energy market conditions could harm the feasibility of LNG export from Egypt. In such a case, the demand for gas from the Leviathan reservoir might converge to the minimum quantities set in the agreements, a thing that would harm the reservoir's revenues and accordingly also the value of Delek Yezum. Another central factor is the price of Brent crude oil. A significant part of the export contracts to Egypt and Jordan is linked, fully or partially, to the Brent price. Therefore, a rise in oil prices is expected to increase the reservoir's revenues, while a decrease in its price will act in the opposite direction.
The challenge of the stock exchange
A dividend in kind distribution poses a unique challenge for the stock exchange and index funds that receive cash, which they reinvest according to the weights of the index shares. In contrast, when the dividend is distributed through shares of a new company, a situation is created where the funds hold securities that are not part of the index they are tracking and they cannot hold them for a long time. On the other hand, they also cannot sell them before the start of trading. Such a situation could create a temporary deviation from the index performance. To prevent this problem, the stock exchange decided to temporarily add the Delek Yezum share to all the indices in which Delek Group was previously included. Thus, the index funds could also hold the new share without harming the tracking accuracy of the indices. However, it was determined in advance that the share would be removed from the indices already at the end of the first trading day — and the funds sold in it all their holdings in an aggregate volume of about 40 million shekels. The stock exchange set the base rate of the Delek Yezum share based on the accounting ratio between the equity of Delek Group and the equity of Delek Yezum. But an accounting ratio does not necessarily reflect the ratio between the economic value of the two companies. Accordingly, with the start of trading, the share price converged to a level that reflected the valuation of the investors. At the end of the first trading day, the Delek Yezum share jumped by about 735% — the sharpest daily rise ever recorded in a share included in the TA-35 index. However, the unusual rise did not reflect a change in the economic value of the company, but mainly the gap between a base rate set on an accounting basis and the price that the market attributed to it already with the start of trading. In this sense, it is mainly an anecdote that teaches about the limitations of the technical pricing mechanism. The author is an economist at a high-tech company.
