INITIATION OF COVERAGE ISRAEL OIL & GAS: E&Pimg2.timg.co.il/CommunaFiles/46902465.pdffrom the Leviathan log testing by end of the month. A result confirming a high quality reserve

Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware thatthe firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified asresearch analysts with FINRA.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 30.

EQUITY RESEARCH 16 December 2010

ISRAEL OIL & GAS: E&PINITIATION OF COVERAGEISRAEL FINDS NATURAL GAS

Israel E&P_Dec 2010.qxp 15/12/2010 20:55 Page 1

Barclays Capital | Israel Oil & Gas: E&P

16 December 2010

ISRAEL FINDS NATURAL GAS

Initiate with 1-Overweight on Delek Energy and Ratio: Uncertainty around potential tax changes and the ability to find project financing lead us to conclude that the risks equal the rewards in the sector and to our 2-Neutral view. We prefer shares in Delek Energy, the most diversified company in the sector, and Ratio, which has the most short-term catalysts in place for 2011, both rated 1-OW.

We initiate coverage on Delek Energy and Ratio Oil with 1-Overweight ratings: Delek Energy trades at an undeserved 25% discount to its sum-of-the-parts valuation. We believe the shares’ low volumes and free float are the main reasons for the discount. But, we see DLEN as our top pick for investors interested in a long-term investment. We see 54% upside potential at Ratio Oil, a pure play on the Leviathan reserve. Ratio is the highest risk, but highest reward option in our sector coverage, but we believe that its volumes ($22m/day) make it attractive for investors with a shorter investment horizon.

Initiate with 2-EW on Delek Drilling and Avner Oil, and rate parent company Delek Group 1-OW. Delek Group is diversified across sectors, including E&P, retail gas, insurance and infrastructure. While this may provide some stability to earnings, we believe it obscures the story, which in our opinion is about E&P. Delek’s annual dividend yields c.4%. Delek Drilling and Avner Oil have similar assets and are both subsidiaries of Delek Energy (which in turn is a subsidiary of Delek Group). Of all four companies, we prefer investment in shares of Delek Energy.

Initiate Isramco with 3-Underweight: Isramco is a pure play on the Tamar reserve. In our view Tamar has the most to lose from potential changes in the tax regime and has the fewest near-term catalysts to drive outperformance. Tamar is a 2P reserve that has already been sanctioned by the partners. While signing off-take agreements and closing financing arrangements are all potentially positive catalysts, we prefer Ratio because of its position in the Leviathan field.

Expect volatility to continue as Sheshinski Committee findings are still to be announced: The Sheshinski Committee is expected to submit its final recommendations to the government by year end. The initial report implied it will likely recommend a special tax that begins once the partners have returned 1.5x the initial investment. While lack of clarity is one of the main reasons for recent volatility, we expect it may take the government until mid-2011 to enact a law, which indicates the uncertainty and volatility are likely to remain with us.

David Kaplan 972 3 623 8747

[email protected] Barclays Capital, London

1


16 December 2010

Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)

Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)

Old New 14-Dec-10 Old New %Chg Old New %Chg Old New %Chg

Israel Oil & Gas: E&P 0-NR 2-Neu

Avner Oil Exploration - LP (AVNRL IT / AVNRp.TA) N/A 2-EW 2.51 N/A 2.98 - N/A 0.02 - N/A 0.03 -

Delek Drilling - LP (DEDRL IT / DEDRp.TA) N/A 2-EW 13.82 N/A 14.55 - N/A 0.12 - N/A 0.21 -

Delek Energy Systems Ltd. (DLEN IT / DLEN.TA) N/A 1-OW 1393.00 N/A 1805.00 - N/A -10.93 - N/A -27.90 -

Isramco Negev 2 LP (ISRAL IT / ISRAp.TA) N/A 3-UW 0.41 N/A 0.48 - N/A 0.00 - N/A -0.00 -

Ratio Oil Exploration (RATIL IT / RATIp.TA) N/A 1-OW 0.52 N/A 0.80 - N/A 0.00 - N/A -0.01 -

Israel Power & Utilities 2-Neu 2-Neu

Delek Group Ltd. (DLEKG IT / DELKG.TA) 1-OW 1-OW 901.50 863.00 1242.00 44 75.00 74.72 0 75.00 78.15 4

Oil Refineries Ltd. (ORL IT / ORL.TA) 2-EW 2-EW 2.48 2.20 2.20 - 0.03 0.03 - 0.01 0.01 -

Ormat Industries Ltd. (ORMT IT / ORMT.TA) 2-EW 2-EW 28.69 36.00 36.00 - 0.32 0.32 - 0.41 0.41 -

Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital.

Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended

Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative

2


16 December 2010

CONTENTS

ISRAEL FINDS NATURAL GAS ..........................................................................................................1 Risk is high, but so is reward – Delek Energy and Ratio are our top picks .................................... 4 And what about the special tax….......................................................................................................... 6 …still holding on to the hope that not all the recommendations will be fully implemented…7 …and of course there is the financing risk........................................................................................... 7

OUTLINE OF SHESHINSKI COMMITTEE PROPOSALS ..................................................................8 Royalties ....................................................................................................................................................... 8 Special tax .................................................................................................................................................... 8 Oil potential beneath the Leviathan prospect....................................................................................12 A little history ............................................................................................................................................12 And the future holds more potential (emphasis on potential) ......................................................12 The key is demand ...................................................................................................................................15

DELEK ENERGY..................................................................................................................................16

RATIO OIL..........................................................................................................................................18

DELEK GROUP ...................................................................................................................................21

DELEK DRILLING AND AVNER OIL ................................................................................................23

ISRAMCO ...........................................................................................................................................27

3


16 December 2010 4

Risk is high, but so is reward – Delek Energy and Ratio are our top picks

Project financing and building infrastructure for export are not givens We launch coverage on the Israeli E&P sector with a 2-Neutral view. There is strong excitement surrounding the sector and concerning the opportunity for the Israeli companies and economy to become significant participants in the export gas market to Europe and the East. However, we believe that the local market has fully priced in the operational risks that lie ahead for the sector, save for two stocks in which we see upside but which admittedly lack the volumes that most international investors require.

The two main risks, in our view, are: project financing and building infrastructure for export. When taking these into account we believe that the best way to invest in the sector is through its most diversified company and accordingly our top pick Delek Energy.

Delek Energy (DLEN) generates cash flow from Yam Tethys (Noa and Mari-B) and is paid royalties (pre-tax) by Delek Drilling. It also has future potential cash flow from the 2P reserve Tamar and is an option on both the Leviathan prospect and future plans on projects in Cyprus along with Noble Energy. Unlike other holding companies, we do not apply a conglomerate discount for Delek Energy since: 1) the management of Delek Energy are the managers of Delek Drilling and Avner oil, and 2) DLEN CEO Gideon Tadmor is, in our view, one of the top E&P professionals in Israel.

Ratio Oil’s sum of the parts valuation reveals the most upside of all of the stocks under our coverage in the sector. However, as a pure play on Leviathan (high risk/reward) and considering its relatively low volumes, this is a stock for a short-term play in the sector. We expect results from the Leviathan log testing by end of the month. A result confirming a high quality reserve and 16tcf of gas would be a catalyst for the stock. Initial 3D seismic testing revealed a 50% geologic probability of such a find. Recent first drill results confirmed that there is gas in the structure. The next set of results are crucial in that a positive result will be the first step towards Leviathan becoming Israel’s first major natural gas exporter in history. We believe that the development of the LNG facility will take time to develop as the partners work their way through the permitting and financing the project, and we therefore would advise those interested in investing in Leviathan that it be for the short term, i.e., until the log results are completed.

Delek Group is the majority shareholder in Delek Energy (80% ownership) and is the most active on the investor relations front, making it an easier stock to invest in. While there is plenty of upside potential in the Delek Group’s shares we prefer shares in Delek Energy which is closer to the E&P assets not exposed to unrelated businesses. Moreover, in that Delek Group is a true holding company we apply a 15% conglomerate discount to our valuation which leaves only modest upside in our model.

Our 2-EW stocks are Avner Oil and Delek Drilling. Although the upside here is similar to that of Isramco, we prefer these given the more diversified asset base.

Isramco is like Ratio in that it is a pure play on one of the reserves in Israel. In this case it is the Tamar field. Tamar is a 2P 8.3tcf reserve for which the main positive catalysts are already behind us. While the project has already been sanctioned, the financing is not as of yet complete. The recent Sheshinski Committee results have also put a damper on the excitement around Tamar. On 13 December two significant contracts were signed by Oil Refineries and Israel Corporation with EMG, the Egyptian gas supplier and the Tamar consortium’s main competitor.

Delek Energy is our top pick for those with a longer term

investment horizon

Ratio Oil with 54% upside potential has the most short terms catalysts and highest

volumes

Delek Group – plenty of upside but too many assets

Isramco has more exposure to tax changes that Ratio and lacks

the short term catalysts


16 December 2010 5

Figure 1: Holding Structure within Delek Group

Source: Reuters

Figure 2: Peer valuation table

Closing

Price Market

Cap PE x

EV/EBITDA x

FCF Yield %

Net Debt/Equity x

Company Currency (local) (GBPm) 10E 11E 12E 10E 11E 12E 10E 11E 12E 10E 11E 12E

E&P's Europe

Afren GBP 1.43 1,384 16.2 6.1 3.3 9.1 3.9 1.8 -6.0 7.0 26.0 25.0 5.0 -25.0

Bowleven GBP 3.47 748 52.0 -77.2 -71.6 -94.1 -89.7 -88.4 -5.0 -4.0 -3.0 -16.0 -7.0 0.0

Cairn Energy GBP 4.11 5,752 28.7 15.3 14.5 13.8 6.7 6.3 -7.2 6.3 8.9 6.0 -15.0 -35.0

JKX Oil & Gas GBP 3.18 546 10.0 7.6 7.9 5.6 3.4 2.9 -5.0 7.0 10.0 -15.0 -20.0 -26.0

Max Petroleum GBP 0.17 78 -0.4 -13.3 -140.4 -99.0 10.3 6.6 -12.0 5.0 11.0 319.0 387.0 363.0

Premier Oil GBP 19.08 2,221 29.4 20.4 8.5 9.7 7.6 3.7 -6.0 0.0 22.0 50.0 43.0 -12.0

Salamander Energy GBP 2.59 398 -33.9 12.5 8.1 3.4 3.2 2.1 20.0 14.0 23.0 20.0 5.0 -16.0

Soco International GBP 3.65 1,242 30.1 11.0 32.1 58.2 8.3 18.7 -7.0 2.0 1.0 -9.0 -11.0 -12.0

Tullow Oil GBP 12.32 10,941 111.0 22.7 10.7 24.1 11.8 6.3 -6.0 -2.0 7.0 -29.0 -10.0 -28.0

E&P's Israel

Avner ILS 2.54 1,491 454.1 282.9 268.3 0.0 0.1 0.2 0.3 0.4 0.4 5.4 -0.2 -2.8

Delek Drilling ILS 13.70 1,318 4,102.1 240.5 227.5 0.02 0.02 0.02 0.4 0.5 0.5 7.9 1.2 -1.9

Delek Energy ILS 1,351 1,192 -12.4 -4.8 -6.5 0.15 0.03 0.03 2.2 1.0 1.0 0.00 0.00 0.00

Isramco ILS 0.44 878 464.5 -296.6 -282.5 -0.2 -0.2 -0.2 -208.3 -208.7 -208.9 37.0 80.1 125.1

Ratio ILS 0.51 608 nm -59.4 -59.1 -2.3 -4.4 -4.2 0.0 0.0 0.0 -1.5 -19.2 -18.0

Source: Barclays Capital; Priced 10 December 2010


16 December 2010 6

Figure 3: Gas fields (red) – illustration of the region*

* For illustration purposes only; locations approximate. Source: Barclays Capital

Figure 4: Working interests in Israel E&P licences* Yam Tethys Tamar Leviathan Hanna David Gal Med Yavne*

Avner Oil 26% 16% 23% 23% 23%

Delek Drilling 23% 16% 23% 23% 23%

Isramco 29% 50%

Ratio Oil 15% 15% 15% 100% 12%

Noble Energy 47% 36% 40% 40% 40%

Delek Group 4%

Dor Gas 4% 3%

* For full list of working interests see Figure 6. Source: Barclays Capital

And what about the special tax…

Another uncertainty that the market is pricing in is the potential change in tax treatment of the gas reserves. On November 11 the government published an interim report from a government committee (Sheshinski Committee) that asked to examine the current tax status of the E&P partnerships; this suggests two significant potential changes to the current regime. The first is to cancel the depletion benefit. This would only impact Delek Energy. The change would effectively raise royalties from 12.5% (11% effective) to 20%. The second and more complicated change is to apply a special tax, which may range from 20%-60%. The tax would be applied once the reserve has recouped 150% of its investment. The tax will increase as the cumulative cash flow increases and will top out at 60% once 230% of the investment is recouped.

Applying all of these potential changes to our model (may be considered conservative) the value of the Tamar reserve falls from c.$10b to $5.1b. Clearly, there is still economic viability for the project but we expect the stocks to be volatile until the final government decision, which is expected before year end.


16 December 2010 7

…still holding on to the hope that not all the recommendations will be fully implemented…

We believe that the market is expecting the Tamar project to receive special dispensation (see Globes, 22 November 2010, “Sheshinski appoints team to examine Tamar finance”). The main underlying reason for re-examining Tamar is that a tax change may delay development, which in turn may cause a disruption of natural gas supply to Israel. However, we prefer at this stage to take a conservative view having seen regulatory change in Israel (Telecom sector) take a harsher stance that we would have expected at first.

…and of course there is the financing risk

Financing for each of the projects has at this stage been put on hold. Until the Sheshinski committee recommendations are complete we believe that that situation will remain unchanged. Once back on track, the Delek Group and its subsidiaries should be able to easily raise funding given their existing cash flows and diversified holdings.

Figure 5: Trading statistics

Price Price Target Upside/Downside Market Cap, ILSm Volume, $ Free Float

Ratio 0.52 0.80 54% 3,554 22,922,203 77%

Avner 2.51 2.98 19% 8,370 8,077,643 39%

Isramco 0.42 0.48 16% 4,709 6,029,008 71%

Delek Energy 1393.0 1805 21% 6,988 243,210 21%

Delek Drilling 13.82 14.55 5% 7,559 5,034,544 29%

Delek Group 901.50 1,242 38% 10,256 6,904,027 35%

Source: Tel Aviv Stock Exchange (data as of close 14 December 2010)


16 December 2010 8

OUTLINE OF SHESHINSKI COMMITTEE PROPOSALS

The recent tax proposals can essentially be broken down into two main parts: Royalties and Special Tax.

Royalties

Current Status Yam Tethys pays a 12.5% royalty to the State on revenues derived from gas sales. The royalties are post exploration expenses and effectively the consortium pays 11%. Beyond the royalty on gross revenues there is also a depletion allowance of 27.5%.

Proposed change The Sheshinski committee recommended to the regulators that royalties be left untouched, but that the depletion allowance be removed. The basis for no longer permitting the depletion allowance is that in Israel licenses are granted and not paid for. In most other countries where there is a depletion credit E&P companies pay for the licenses, either through a fee or by way of auction. This would only impact Delek Energy.

Special tax

Current situation The gas E&P partnerships do not pay corporate tax. Tax is paid by owners of the units as partners at their corporate rate. Individuals and institutional investors pay at the income or corporate tax rate.

Proposed change The committee suggestion includes charging a graduated tax on profits beginning at 20% once cash flow hits 1.5x capex, and topping out at 60% at 2.3x capex. The tax will be applied to the reserve and not at the company level.

What it means Applying the special tax in our models changes the value of Yam Thethys by $1.4bn, Tamar by $4.1bn and Leviathan Domestic by $1.6. This is a change in value of each of the reserves and not the companies. We emphasize that these changes are pre financing charges which are incurred at the company level.


16 December 2010 9

Figure 6: Mari and Noa Field - NPV

Total units 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Gas Production

Gas production 1,228.5 Bcf 164.6 222.4 270.8 338.5 280.5 319.2 367.5 367.5 367.5 367.5 299.8

Gross Revenues 179.3 221.8 274.4 381.9 350.5 500.9 670.7 697.5 697.5 697.5 569.0

Opex (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0)

Royalties (18.9) (25.6) (31.1) (38.9) (32.3) (36.7) (42.3) (42.3) (42.3) (42.3) (32.2)

Cash-Flow Analysis

Gross Revenues 5,241.0 $mm 179.3 221.8 274.4 381.9 350.5 500.9 670.7 697.5 697.5 697.5 569.0

Royalties (18.9) (25.6) (31.1) (38.9) (32.3) (36.7) (42.3) (42.3) (42.3) (42.3) (32.2)

Net Revenues 160.3 196.2 243.3 342.9 318.2 464.2 628.4 655.3 655.3 655.3 536.9

Entitlement Production 24.5 32.8 40.0 50.7 42.4 49.3 57.4 57.5 57.5 57.5 47.1

Opex (220.0) $mm (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0)

Capex (651.5) $mm (81.0) (95.0) (103.1) (1.1) (1.1) (1.1) (146.2) (21.2) (133.2) (67.2) (1.3)

Tax (1,907.4) $mm - - - - - (113.2) (340.7) (381.2) (381.2) (381.2) (310.1)

TOTAL 2,077.3 $mm 59.3 81.2 120.2 321.9 297.1 329.9 121.6 232.9 120.9 186.9 205.5

NPV 649.1 $mm

Source: Barclays Capital

Figure 7: Mari and Noa Field - Petroleum Rights

Mari and Noa Med Yavne

Company % Company %

Noble Energy 47.06% Isramco 49.86%

Delek Drilling 25.50% Israel Oil 14.77%

Avner 23.00% Ratio 12.31%

Delek Invest. Properties 4.44% Israeli Petrochem. 5.54%

Jerusalem Oil 4.43%

Naphta Explor. 3.51%

Equital 3.33%

Dor Chemicals 2.77%

Dor Gas Exploration 2.77%

Isramco 0.71%

Source: Israel Ministry of National Infrastructures (updated 17 October 2010)


16 December 2010 10

Figure 8: Tamar field - NPV

Total units 2013 2014 2015 2016 2017 2018 2019-2033

Gas Production

Gas production 10,265.6 [MMScf/d] 590.8 648.9 726.4 784.5 852.3 920.1 19,050.3

Gas production [bbl/d] 98.5 108.1 121.1 130.7 142.0 153.3 3,175.0

Royalty Gas [%] 67.9 74.6 83.5 90.2 98.0 105.8 2,190.8

After Royalty Production 9,085.1 [MMScf/d] 522.8 574.3 642.8 694.3 754.3 814.3 16,859.5

Total royalty [%] 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5%

Revenues

Gross Revenues - Gas 16,330.8 [$mm] 1,121.3 1,231.6 1,378.7 1,488.9 1,617.6 1,746.3 36,157.4

Entitlement Production [boe/d] 87.14 95.71 107.14 115.71 125.71 135.71 2,809.9

Net Revenues - Gas 14,452.7 [$mm] 992.4 1,090.0 1,220.1 1,317.7 1,431.6 1,545.5 31,999.3

Cash-Flow Analysis

Net revenues 39,596.5 [$mm] 992 1,090 1,220 1,318 1,432 1,545 31,999.3

Opex (1,076.7) [$mm] (50.0) (50.1) (50.3) (50.4) (50.5) (50.6) (774.8)

Capex (3,032.3) [$mm] (601.1) (601.1) (1.1) (1.2) (1.2) (1.2) (22.4)

ST Tax [$mm] - - - - - (325.6) (18,396.6)

TOTAL 19,671.4 [$mm] 341.3 438.7 1,168.7 1,266.2 1,379.9 1,168.1 12,805.5

NPV 5,084.0


Figure 9: Tamar Field - Petroleum Rights

Company %

Noble Energy 36.00%

Isramco 28.75%

Avner 15.63%

Delek Drilling 15.63%


Source: Israel Ministry of National Infrastructures (Updated on 17/10/2010)


16 December 2010 11

Figure 10: Leviathan field - NPV

Total units 2016 2017 2018 2019 2020 2021

2022-2049

Gas Production

Gas production 15,836.8 [MMScf/d] 677.9 677.9 677.9 677.9 1,355.9 1,355.9 37,964.9

Gas production [bbl/d] 113.0 113.0 113.0 113.0 226.0 226.0 6,327.5

Royalty Gas [%] 78.0 78.0 78.0 78.0 155.9 155.9 4,366.0

After Royalty Production 10,073.7 [MMScf/d] 600.0 600.0 600.0 600.0 1,200.0 1,200.0 33,599.0

Total royalty [%] 11.5% 11.5% 11.5% 11.5% 11.5% 11.5%

Revenues

Gross Revenues - Gas 15,029.1 [$mm] 1,286.7 1,286.7 1,286.7 1,286.7 2,573.5 2,573.5 72,127.9

Entitlement Production [boe/d] 100.00 100.00 100.00 100.00 199.99 199.99 4,199.9

Net Revenues - Gas 13,300.8 [$mm] 1,138.8 1,138.8 1,138.8 1,138.8 2,277.5 2,277.5 63,833.2

Cash-Flow Analysis

Net revenues 72,943.4 [$mm] 1,139 1,139 1,139 1,139 2,278 2,278 63,833.2

Opex (24,535.6) [$mm] (394.9) (396.6) (398.2) (399.9) (731.6) (733.4) (21,480.9)

Capex (8,053.9) [$mm] (1,376.0) (1,376.1) (1,376.1) (834.1) (834.1) (834.2) (47.4)

CT Tax [$mm] - - - - - - -

ST Tax [$mm] - - - - - - (16,776.5)

TOTAL 23,577.3 [$mm] (632.2) (633.8) (635.5) (95.3) 711.8 710.0 25,528.4

NPV 3,677.7


Figure 11: Leviathan Field - Petroleum Rights

Company %

Noble Energy 39.66%

Avner 22.67%

Delek Drilling 22.67%


Source: Israel Ministry of National Infrastructures (updated on 17 October 2010)


16 December 2010 12

Oil potential beneath the Leviathan prospect

Prior to January 2009 the only time Israel and E&P were mentioned in the same sentence was as a punch line to a joke. Eight trillion cubic feet of natural gas later we are launching coverage on five local stocks that are the most direct ways to invest in Israeli E&P. Although there are plenty of potential catalysts in the sector first and foremost being the current drilling at the Leviathan prospect in Northern Israel (we expect a post spud update in December) with the second being the potential for oil underneath Leviathan, we believe that the market is not properly pricing in the risks associated with E&P in general and in the Israeli prospects specifically.

A little history

Prior to 2004, 100% of Israel’s energy supply was imported from overseas sources. In 2004, Yam Tethys came on line and began supplying the market with 1.1tcf of natural gas at an initial rate of 88bcf per year. While demand has begun to grow progress was hampered by the fact that future supply would once again need to come from overseas. In 2009 the discovery of gas at the Tamar prospect, which is 8x the size of Yam Tethys, prospectively provided enough natural gas for Israel for the next c.25 years. The project was sanctioned on September 23 at an estimated gross capital cost of $3.0bn.

And the future holds more potential (emphasis on potential)

The Leviathan field has captured the imagination of the local markets. To date the reports by the Delek Group and its partner Noble Energy have stated very clearly that total gross resources are estimated at 16tcf with a 50% chance of success (see Noble Energy press release 6 August 2010). Drilling of Leviathan began in August and has three targets. The first is the NG10 well located in a depth of 16,716 feet (including water depth). The subsequent targets are estimated to hold resources of 3bbl and 1.2bbl of oil with a probability of finding hydrocarbons at 17% and 8%, respectively, at depths of 19,029 feet and 23,622 feet.

Our models take into account the oil potential, but given the early stage of development, lack of data, depth of prospect and relatively low probability of finding hydrocarbons we apply a significant discount.


16 December 2010 13

Figure 12: Israel Petroleum rights

Source: Israel Ministry of National Infrastructures website, Barclays Capital (updated August 1, 2010)


16 December 2010 14

Figure 13: Gas transmission system

Source: Israel Ministry of National Infrastructures website, Barclays Capital


16 December 2010 15

The key is demand

Israel’s demand for natural gas is relatively low. Lack of supply, cheap coal sources and a relatively non-existent consumer market are the main reasons. The Ministry of Infrastructure has published its view of how demand can grow.

Figure 14: Demand for Natural Gas by sectors

3.9 4.4 4.8 5.2 5.4 5.7 6.1 6.7 6.8 7.1 7.2 7.8 7.8 8.2 8.6 9.3 9.7 10.4 10.9 11.3 11.8 12.71.3 1.5 2.1 2.4 2.7 2.8 2.9 3.0 3.1

3.3 3.4 3.5 3.63.7 3.8 3.9 4.0 4.0 4.0

4.1

0.50.3

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

BCM

- p

er a

nnum

BCM NG for Power Other sectors

Source: Israel Ministry of National Infrastructures, Barclays Capital

While the chart may appear aggressive, we believe that growth is bubbling beneath the surface. We have already seen demand come from untraditional sources such as Israel Chemical’s plant near the Dead Sea. Beyond that, both oil refiners recently completed upgrades at their facilities and the natural gas market for cars is on the rise.

Figure 15: Israeli Gas production

0

50000

100000150000

200000

250000

300000

350000400000

450000

500000

2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Gas production MMCF/year

Source: Israel Ministry of National Infrastructures, Barclays Capital estimates


16 December 2010 16

DELEK ENERGY

We launch coverage of Delek Energy with a 1-Overweight rating and an ILS 1,805 PT. DLEN trades at an underserved 21% discount to the sum of its parts. Diversified assets, potential upside from investments outside Israel and current cash flows from operations make this our top pick.

Delek’s knowhow in the energy sector is based in the management team of DLEN. Gideon Tadmor, DLEN’s CEO, has a wealth of experience in the sector and we believe, in this case the company’s human capital is one of its strongest assets and underpins our favourable view of the stock.

Near-term catalysts for Delek include: 1) log results from the Leviathan NG10 well expected by the end of December, and 2) throughout 1H11 results from the second two targets at Leviathan.

Figure 16: DLEN Rights

Source: Israel Ministry of National Infrastructures website, Barclays Capital

DLEN IT / DLEN.TA

Stock Rating 1-Overweight

Price Target ILS 1805 Price (14 December 2010) 1,393 Potential Upside 21%


16 December 2010 17

Figure 17: Delek Energy – NAV Model

Israel E&P Methodology Value of Holding (ILS m) % of Gross NAV Total

Delek Drilling Sum of the parts 3,661

Avner Oil Sum of the parts 5,598

Total Israel 9,259

US E&P Methodology Value of Holding (ILS m) % of Gross NAV

Elk Book Value 362

Aries Book Value 22 43.1%

Total US 384

Other

Matra Market Price 38

Vogil Book Value 13 25.4%

Total Other 50

Total Gross sum of the parts 9693

Net Debt 1,265

Total Net sum of the parts 8,428

Current market value 6,777

PT 1,805

Current Price 1,393

Source: Company data, Barclays Capital

Figure 18: Delek Energy – Income Statement

NIS mn 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e

Revenues 302 394 384 795 1,032 1,060 2,119 2,222 2,172

COGS 166 190 183 151 457 468 869 909 890

Gross Profit 136 205 201 151 457 468 869 909 890

G&A 23 36 43 89 116 119 238 250 244

EBIT 113 169 158 62 341 349 631 659 646

Finance Expense -123 -165 -164 0 0 0 0 0 0

Finance Income 30 97 5 11 14 14 28 29 29

Share in earnings of JVs, net 31 -42 19 19 19 19 19 19 19

EBT 52 58 18 92 374 382 679 708 694

Income Tax Benefit (Payment) 1 -5 11

Post-tax Earnings continuing ops 52 53 29 92 374 382 679 708 694

Post-tax Earnings discontinued ops -0 -48 -6

Attributions

Company Shareholders 58 64 56 147 514 486 824 832 798

Minority Interest -6 -59 -34 -55 -140 -104 -145 -125 -104

Net Income 52 5 23 92 374 382 679 708 694

Currency translation -44 10 -5

Equity gains (losses) 8 -42 -5

Tax expense (benefit) in currency translation 7 -1 2

Other 1

Minority Interest

Comprehensive Net Income 23 -28 15 92 374 382 679 708 694

Company Shareholders -24 -94 -39 -66 -157 -113 -155 -131 -109

Minority Interest 48 66 54 158 531 495 834 839 802

Diluted EPS -1.21 -12.85 -7.23 -10.93 -27.90 -20.74 -28.94 -24.86 -20.72

Source: Company data, Barclays Capital


16 December 2010 18

RATIO OIL

We launch coverage of Ratio Oil with a 1-Overweight rating and an ILS 0.80 PT. Ratio trades at 54% below our PT. Thin volumes and the fact that it is a pure play on Leviathan are probably the main reasons why Ratio trades at such a significant discount to NAV. While some of the discount may be deserved we believe the extent of the discount is overdone.

Ratio is more diversified than most understand. Ratio recently announced that it completed 3D seismic testing at the Gal licence. While we do not expect results before the end of 1Q it is important to point out that the catalysts are in place and that this differentiates Ratio from the other pure play under our coverage, Isramco.

Near-term catalysts for Delek include: 1) log results from the Leviathan NG10 well expected by the end of December; 2) throughout 1H11, results from the second two targets at Leviathan; and 3) 3D seismic results from Gal.

Figure 19: Ratio Ownership in Petroleum Rights

Source: Israel Ministry of National Infrastructures website, Barclays Capital (updated 10 October 2010)

RATIL IT / RATIp.TA


Price Target ILS 0.80 Price (14 December 2010) 0.52 Potential Upside 54%


16 December 2010 19

Figure 20: Ratio - NAV

Risked Reserv./Resour. Risked

Assets Country/ Licence WI %

Hydroc. Fluid

Gross CAPEX

$mn CoS%

Gross mmboe

Net (WI) mmboe

NPV/boe $/boe

NPV $mn

NPV ILSmn

NPV ILS/sh

% Tot NAV

Unrisk.NPV

ILS/sh

Core NAV

Contingent Developments 519 1935 0.38 0.36 2.00

Leviathan Export Israel 15% LNG 25% 3450 518 1.3 169 631 0.09 11.61 0.37

Exploration/Appraisal

Leviathan Oil #1 Israel 15% Oil/Gas 17% 2981 447 5.6 428 1595 0.23 0.29 1.37

Leviathan Oil #2 Israel 15% Oil/Gas 8% 1244 187 6.1 91 340 0.05 0.06 0.62

Leviathan Domestic Israel 15% Gas 50% 3678 552 2.8 769 2867 0.42 52.77 0.84

E&A upside 1287 4802 0.80 53.13 2.83

Total NAV 1287 4802 0.80 100 2.83

Source: Company reports, Barclays Capital


16 December 2010 20

Figure 21: Ratio – Income Statement

ILSmn 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F

Oil price, Brent, $/bl 96.9 61.6 80.0 90.0 100.0 100.0 100.0 100.0

Net WI production, k boe/d 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Sales revenue 0 0 0 0 0 0 0 0

Cost of sales 0 0 0 0 0 0 0 0

Gross (loss)/profit 0 0 0 0 0 0 0 0

Depreciation 0 0 0 0 0 0 0 0

$/bbl - - 3.8 3.8 3.8 3.8 3.8 3.8

Exploration Expenses/Write-offs (4) (10) (15) (15) (15) (15) (15) (15)

Administration Expenses (1) (2) (2) (2) (2) (2) (3) (3)

Impairments 0 0 0 0 0 0 0 0

Operating (loss)/profit (5) (12) (17) (17) (17) (17) (17) (18)

Finance Income 2 1 21 0 0 0 0 0

Finance costs 1 (59) (2) 0 0 0 0 0

Other Non-operating Income (0) (0) (7) 0 0 0 0 0

Profit/(Loss) before tax (2) (70) (5) (17) (17) (17) (17) (18)

Income Tax Expense 0 0 0 0 0 0 0 0

Tax rate, % 0% 0% 0% 0% 0% 0% 0% 0%

Profit for the year (2) (70) (11) (17) (17) (17) (17) (18)

Minority Interest 0 0 0 0 0 0 0 0

Equity Holders of parent (2) (70) (11) (17) (17) (17) (17) (18)

Eps (Basic, cILS/sh) -11.917 -0.034 -0.005 -0.008 -0.008 -0.008 -0.008 -0.008



16 December 2010 21

DELEK GROUP

We rate the Delek Group to 1-Overweight. In our view stocks like DLEN and Ratio will outperform as the focus in the market remains on E&P. Delek has a more diversified portfolio, more stable cash flows and an easier time raising debt that any of the other companies in the sector. However, other than the catalysts we listed for Delek Energy there are no other short-term catalysts for Delek Group.

In our view, outside of the E&P sector Delek’s most interesting asset is IDE, the water desalination business. However given its size relative to the E&P businesses it simply is not large enough to make Delek Group our top pick of the group.

Delek Group trades at 62% discount to its sum of the parts, which after we apply a 15% conglomerate discount leaves no upside. Our new price target is ILS 1,242.

Figure 22: Delek Group - NAV

Public Methodology Value of Holding

(ILS m) % of Gross

NAV Total

Energy Significant Energy Holdings Delek US Market Price 845 3.9% Delek Energy Market Price 9,257 43.3% Delek Israel Fuel Market Price 1,103 5.2% Other Energy Holdings Market Price 2,195 10.3% Total Public Energy Holdings 13,394

Insurance and Financial Holdings Significant Insurance and Financial Holdings Phoenix Market Price 1,471 6.9% Total Public Insurance and Financial Holdings 1,471

Automotive/Other Delek Automotive Market Price 2,389 11.2% Other Holdings Market Price 81 0.4% Total Public Automotive and Other Holdings 2,470

Sub-total 17,335

Private Methodology Value of Holding

(ILS m) % of Gross NAV

Energy IDE (Desalinization) 18x annualized '10 estimated net income 900 4.2% Delek Europe Purchase price 1,443 6.8% Other Energy Holdings Market Price 394 1.8% Total Private Energy Holdings 2,737

Other Holdings Market Price 164 0.8% Insurance and Financial Holdings 1x BV at 3Q 10 1,149 5.4% Sub-total 4,060 Gross Asset Value 21,395 Net Debt 4,766 Net Asset Value 16,629 NAV/Share 1,461 Delek/Share 901 Discount to NAV 62%


DLEKG IT / DELKG.TA


Price Target ILS 1,242 Price (14 December 2010) 901 Potential Upside 38%


16 December 2010 22

Figure 23: Delek Group – Income Statement

ILS Millions 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e

Total Revenues 39118 46240 43447 45575 47082 48647 50302 52024 53815

Cost of Revenue 32989 40651 37032 40066 41392 42767 44222 45736 47310

Gross Profit 6129 5589 6415 5509 5691 5880 6080 6288 6505

Appreciation of investment prop, net

Sales, Marketing and gas station operating expense 2391 3157 3426

G&A 1067 1476 1768

Other Income -35 40 311

EBIT 2636 996 1532 1625 1693 1764 1856 1954 2057

Finance Expense, net -870 -1458 -840 -850 -850 -850 -850 -850 -850

1766 -462 692 775 843 914 1006 1104 1207

Gain from sale of investments in investees, net 367 69 518 518 518 518 518 518 518

Share in earnings of JVs, net 174 -12 191 191 191 191 191 191 191

Other expenses, net

EBT 2307 -405 1401 1484 1552 1623 1715 1813 1916

Tax 607 -37 215 228 238 249 263 278 294

Post-tax Earnings continuing ops 1700 -368 1186 1256 1314 1374 1452 1535 1622

Post-tax Earnings discontinued ops 536 -1945 17 0

Attributions

Company Shareholders 1297 -1809 864 873 913 954 1009 1066 1127

Minority Interest 939 -504 339 383 401 419 443 468 495

Net Income 2236 -2313 1203 1256 1314 1374 1452 1535 1622

Comprehensive income from cont ops -311 -1648 399

Comprehensive Attributions

Company Shareholders 1079 -2818 1113 873 913 954 1009 1066 1127

Minority Interest 846 -1143 489 383 401 419 443 468 495

Comprehensive Net Income 1925 -3961 1602 1256 1314 1374 1452 1535 1622

Diluted EPS 110.64 -163.49 74.93 74.72 78.15 81.72 86.36 91.28 96.50

Basic Shares Outstanding 11.60 11.60 11.24 11.68 11.68 11.68 11.68 11.68 11.68



16 December 2010 23

DELEK DRILLING AND AVNER OIL

We launch coverage of Delek Drilling and Avner Oil with 2-Equal Weight ratings. While our price targets of ILS 14.55 and ILS 2.98 leave 5% and 19% upside we believe that investing in the Delek Energy provides better upside.

The Sheshinski committee results will weigh on these stocks in particular. On 13 December (Monday) Oil Refineries (ORL) and Israel Chemicals (ICL) announced take off agreements with EMG the Egyptian natural gas company. In our view, the 22.5 MMBTU per year contract was signed with EMG largely because the timing of the development of Tamar is now more uncertain.

The sell off on 13 December is an example of how volatile these stocks can be, and of how Delek Energies’ more diversified portfolio can provide some downside protection.

Figure 24: Delek Drilling and Avner – Petroleum Rights


DEDRL IT / DEDRp.TA

Stock Rating 2-Equal Weight


AVNRL IT / AVNRp.TA Stock Rating 2-Equal Weight



16 December 2010 24

Figure 25: Delek Drilling - NAV


Assets Country/ Licence

WI %

CoS %

Gross mmboe

Net (WI)mmboe

NPV/boe$/boe

NPV ILS/sh

% Tot NAV

Unrisk NPV

ILS/sh

Producing

Mari and Noa Israel 26% 100% 205 52 5.1 1.82 12.50 1.82

Under development

Tamar Israel 16% 100% 1434 224 3.5 5.42 37.23 5.42

Cash/(Net Debt) - 0.00 0.00

BS adj. - 0.00 0.00

Core NAV 7.24 49.73 7.24

Contingent Developments 7.09 48.73 44.65

Leviathan Export Israel 23% 25% 3450 782 1.3 1.74 11.98 6.97


Leviathan Oil #1 Israel 23% 17% 2981 676 5.6 4.41 30.29 25.93

Leviathan Oil #2 Israel 23% 8% 1244 282 6.1 0.94 6.46 11.74

Leviathan Israel 23% 50% 3678 834 2.8 7.92 54.44 15.84

E&A upside 15.01 103.17 60.49

NPV of Royalties paid 7.70 52.89 7.70

Total NAV 14.55 100.00 67.73


Figure 26: Delek Drilling – Income Statement

$mn 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F



Sales revenue 97 89 128 171 178 353 370 361

Cost of sales (26) (26) (32) (35) (35) (70) (74) (73)

$/bbl 5.0 6.1 6.4 6.1 6.2 6.2 6.2 6.3


Depreciation (17) (14) (17) (20) (20) (39) (41) (40)

$/bbl 3.5 3.6 3.8 3.8 3.8 3.8 3.8 3.8

Exploration Expenses/Write-offs (2) (6) (7) 0 0 0 0 0



Operating (loss)/profit 51 42 68 112 119 240 251 244


Finance costs (7) (4) (3) 0 0 0 0 0

Other Non-operating Income 0 0 0 0 0 0 0 0

Profit/(Loss) before tax 47 38 66 112 119 240 251 244


Tax rate, % 0% 0% 0% 0% 0% 0% 0% 0%

Profit for the year 47 38 66 112 119 240 251 244


Equity Holders of parent 47 38 66 112 119 240 251 244

N. share fully diluted 546,967 546,967 546,967 546,967 546,967 546,967 546,967 546,967

Eps (Basic, c$/sh) 0.087 0.070 0.121 0.206 0.217 0.439 0.459 0.446



16 December 2010 25

Figure 27: Avner Oil - NAV


Assets

Country/ Licence

WI %

Hydroc. Fluid

CoS%

Gross mmboe

Net (WI) mmboe

NPV/boe $/boe

NPV $mn

NPV ILSmn

NPV ILS/sh

% Tot NAV

Unrisk.NPV

ILS/sh

Producing

Mari and Noa Israel 23% Gas 100% 205 47 5.1 241 897 0.27 9.03 0.27

Under development

Tamar Israel 16% Gas 100% 1434 224 3.5 786 2931 0.88 29.50 879

Cash/(Net Debt) - - - - -

BS adj. - - - - -

Core NAV 1026 3828 1.15 38.53 879

Contingent Developments 1040 3878 1.16 39.03 6179

Leviathan Export Israel 23% LNG 25% 3450 782 1.3 256 953 0.29 9.60 1144


Leviathan Oil #1 Israel 23% Oil/Gas 17% 2981 676 5.6 646 2411 0.72 24.27 4253

Leviathan Oil #2 Israel 23% Oil/Gas 8% 1244 282 6.1 138 514 0.15 5.17 1926

Leviathan Domestic Israel 23% Gas 50% 3678 834 2.8 1162 4333 1.30 43.61 2599

E&A upside 2201 8211 2.46 82.64 8778

564 2104 0.63 21.17

Total NAV 2664 9936 2.98 100.00 9657



16 December 2010 26

Figure 28: Avner – Income Statement

$mn 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F



Sales revenue 88 81 115 154 160 336 353 346

Cost of sales (19) (19) (21) (25) (25) (53) (56) (55)

$/bbl 3.9 4.8 4.8 4.8 4.9 4.9 4.9 5.0


Depreciation (14) (12) (16) (18) (18) (37) (39) (38)

$/bbl 3.4 3.5 3.8 3.8 3.8 3.8 3.8 3.8

Exploration Expenses/Write-offs (2) (6) (7) 0 0 0 0 0



Operating (loss)/profit 51 40 68 108 114 242 254 249


Finance costs (6) (4) (2) (2) (2) (2) (2) (2)


Profit/(Loss) before tax 48 38 66 106 112 240 252 247


Tax rate, % 0% 0% 0% 0% 0% 0% 0% 0%

Profit for the year 48 38 66 106 112 240 252 247


Equity Holders of parent 48 38 66 106 112 240 252 247

N. share fully diluted 3,334,831 3,334,831 3,334,831 3,334,831 3,334,831 3,334,831 3,334,831 3,334,831

EPS (Basic, c$/sh) 14.3 11.3 19.8 31.8 33.5 72.0 75.6 74.0



16 December 2010 27

ISRAMCO

We initiate coverage on Isramco with an ILS0.48 price target and 3-Underweight rating. Isramco is a pure play on the 8.3tcf Tamar reserve. Our 3-UW rating is because Isramco now faces financing risks and uncertainty around the tax regime on the one hand and lacks short-term catalysts on the other.

The recent contract signed by Oil Refineries and Israel Corp have a direct impact on Tamar's ability to negotiate off-take agreements with the Israeli customers. We believe that once the tax issue is cleared up Isramco and Tamar will resume negotiations. However, until then uncertainty will weigh on the shares.

While the Sheshinski Committee impacts the entire sector, it is most tangible at the Tamar project. According to the initial recommendations there will only be a tax burden on gas sold into the Israeli market. The Leviathan prospect is most likely to be used for export while Tamar is sanctioned for domestic use.

Figure 29: Isramco - Petroleum Rights


ISRAL IT / ISRAp.TA

Stock Rating 3-Underweight



16 December 2010 28

Figure 30: Isramco - NAV


Assets Country/ Licence WI %

Hydroc. Fluid

Gross CAPEX

$mn CoS%

Gross mmboe

Net (WI) mmboe

NPV/boe $/boe

NPV $mn

NPV ILSmn

NPV ILS/s

% Tot NAV

Unrisk.NPV

ILS/sh

Under development

Tamar Israel 29% Gas 0 100% 1434 412 3.5 1462 5452 0.48 100 0

Cash/(Net Debt) - - - - -

BS adj. - - - - -

Core NAV 1462 5452 0.48 100 0

E&A upside 0 0 0.00 0 0

Total NAV 1462 5452 0.48 100 0


Figure 31: Isramco – Income Statement

ILSmn 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F



Sales revenue 0 0 0 0 0 1,202 1,321 1,478

Cost of sales 0 0 0 0 0 (17) (19) (21)

$/bbl - - - - - 1.7 1.7 1.7

Gross (loss)/profit 0 0 0 0 0 1,185 1,302 1,457

Depreciation 0 0 0 0 0 (9) (10) (11)

$/bbl - - 3.8 3.8 3.8 3.8 3.8 3.8

Exploration Expenses/Write-offs (2) (2) (12) 0 0 0



Operating (loss)/profit (4) (8) (25) (13) (14) 1,162 1,277 1,430

Finance Income 36 167 64 0 0 0 0 0

Finance costs (202) (3) (32) 0 0 0 0 0


Profit/(Loss) before tax (170) 156 8 (13) (14) 1,162 1,277 1,430


Tax rate, % 0% 0% 0% 0% 0% 0% 0% 0%

Profit for the year (171) 215 8 (13) (14) 1,162 1,277 1,430


Equity Holders of parent (171) 215 8 (13) (14) 1,162 1,277 1,430

N. share fully diluted 4,250,908 9,351,752 9,351,752 9,351,752 9,351,752 9,351,752 9,351,752 9,351,752

Eps (Basic, cILS/sh) -0.040 0.017 0.001 -0.001 -0.001 0.124 0.137 0.153



16 December 2010 29

Valuation Methodology and Risks

Israel Oil & Gas: E&P

Avner Oil Exploration - LP (AVNRL IT / AVNRp.TA)

Valuation Methodology: We use a sum of the parts valuation which values each of the reserves individually using a 10% discount rate. We model Mari and Noa at ILS 5bn, Tamar at ILS 5b and then multiple the NPV by the working intetest. Levithan is divided into four projects a) Leviathan domestic whose NPV is 3.7 and on which we apply a 50% chance of success b) Leviathan Export's NPV is ILS 3.5b and chance of success is 25% c) Leviathan Oil Well 1's NPV is ILS 17b and COS is 17% and d) Leviathan Oil Well 2's NPV is ILS 7b and COS is 8%.

Risks which May Impede the Achievement of the Price Target: Changes to the local tax regime, international disputes over the location of Leviathan and volitility of the natural gas market may have a negative impact on our forecasts.

Delek Drilling - LP (DEDRL IT / DEDRp.TA)



Delek Energy Systems Ltd. (DLEN IT / DLEN.TA)



Isramco Negev 2 LP (ISRAL IT / ISRAp.TA)

Valuation Methodology: We use a sum of the parts valuation which values each of the reserves individually using a 10% discount rate. We value Tamar at ILS 5b and then multiple the NPV by the working intetest.

Risks which May Impede the Achievement of the Price Target: Changes to the local tax regime and volitility of the natural gas market may have a negative impact on our forecasts.

Ratio Oil Exploration (RATIL IT / RATIp.TA)

Valuation Methodology: We use a sum of the parts valuation which values each of the reserves individually using a 10% discount rate. We model Levithan by dividing it into four projects a) Leviathan domestic whose NPV is 3.7 and on which we apply a 50% chance of success b) Leviathan Export's NPV is ILS 3.5b and chance of success is 25% c) Leviathan Oil Well 1's NPV is ILS 17b and COS is 17% and d) Leviathan Oil Well 2's NPV is ILS 7b and COS is 8%.


Israel Power & Utilities

Delek Group Ltd. (DLEKG IT / DELKG.TA)

Valuation Methodology: We use a sum-of-the-parts model to value the Delek Group. We use market cap for most of the publicly traded assets as well as DCF for the E&P and US retail fuel business, which comes to ILS 17,335m and various methodologies including price-to-book of 1x Republic insurance, 18x annualized earnings for IDE, purchase price less debt for Delek Europe to arrive at a value of ILS 4,060m for the privately held subsidiaries. We then subtract ILS 4,766m in net debt and apply a 15% discount to arrive at our ILS 16,629m valuation. There are 11.7 million shares outstanding; on a diluted basis we derive our ILS1242 price target.

Risks which May Impede the Achievement of the Price Target: A worsening of the credit markets, a further slowdown in the local car market, lower volumes of natural gas at the existing resources than expected and weak capital markets affecting the insurance business may prevent Delek from achieving our price target.



16 December 2010 30

ANALYST(S) CERTIFICATION(S)

I, David Kaplan, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of thesubject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related tothe specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report,please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer tohttp://publicresearch.barcap.com or call 1-212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account.

On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investmentmanagement businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.

Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in othertypes of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Primary Stocks (Ticker, Date, Price)

Avner Oil Exploration - LP (AVNRp.TA, 14-Dec-2010, ILS 2.51), 2-Equal Weight/2-Neutral

Delek Drilling - LP (DEDRp.TA, 14-Dec-2010, ILS 13.82), 2-Equal Weight/2-Neutral

Delek Energy Systems Ltd. (DLEN.TA, 14-Dec-2010, ILS 1393.00), 1-Overweight/2-Neutral

Delek Group Ltd. (DELKG.TA, 14-Dec-2010, ILS 901.50), 1-Overweight/2-Neutral

Isramco Negev 2 LP (ISRAp.TA, 14-Dec-2010, ILS 0.41), 3-Underweight/2-Neutral

Ratio Oil Exploration (RATIp.TA, 14-Dec-2010, ILS 0.52), 1-Overweight/2-Neutral

Materially Mentioned Stocks (Ticker, Date, Price)

Oil Refineries Ltd. (ORL.TA, 14-Dec-2010, ILS 2.48), 2-Equal Weight/2-Neutral

Ormat Industries Ltd. (ORMT.TA, 14-Dec-2010, ILS 28.69), 2-Equal Weight/2-Neutral

Guide to the Barclays Capital Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sectorcoverage universe”).

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investorsshould carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-monthinvestment horizon.

RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable orto comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company.

Sector View

1-Positive - sector coverage universe fundamentals/valuations are improving.

2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "sector coverage universe":


16 December 2010 31

IMPORTANT DISCLOSURES CONTINUED

Israel Oil & Gas: E&P

Avner Oil Exploration - LP (AVNRp.TA) Delek Drilling - LP (DEDRp.TA) Delek Energy Systems Ltd. (DLEN.TA)

Isramco Negev 2 LP (ISRAp.TA) Ratio Oil Exploration (RATIp.TA)

Israel Power & Utilities

Delek Group Ltd. (DELKG.TA) Oil Refineries Ltd. (ORL.TA) Ormat Industries Ltd. (ORMT.TA)

Distribution of Ratings:

Barclays Capital Inc. Equity Research has 1710 companies under coverage.

43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 52% ofcompanies with this rating are investment banking clients of the Firm.

43% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 45% ofcompanies with this rating are investment banking clients of the Firm.

12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 37% ofcompanies with this rating are investment banking clients of the Firm.

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PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 30.

EQUITY RESEARCH 16 December 2010

ISRAEL OIL & GAS: E&PINITIATION OF COVERAGEISRAEL FINDS NATURAL GAS

Israel E&P_Dec 2010.qxp 15/12/2010 20:55 Page 1

Documents

INITIATION OF COVERAGE ISRAEL OIL & GAS: E&Pimg2.timg.co.il/CommunaFiles/46902465.pdffrom the Leviathan log testing by end of the month. A result confirming a high quality reserve