Zion Oil and Gas: Good Speculative Play or Stay Away?

Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to geological surveys, the Middle Eastern nation of Israel has potentially game-changing reserves of petroleum and natural gas right off its shores. There are signs that even more natural gas could be in those reserves than initially thought.  Israel's natural gas is a large economic and strategic factor for the country, as well as for investors - after all, these reserves are thought to be some of the largest proven reserves in the world. Zion Oil & Gas (NASDAQ: ZN) is one company seeking to find economically recoverable petroleum and natural gas in Israel. Should investors consider adding Zion Oil & Gas in their portfolio as a play on Israel's natural gas finds? Zion Oil & Gas is not a strong, viable company at this point; there is no compelling reason to jump on the ship at this point. Three stronger alternatives to profit off of Israel's energy revolution would be Delek US Holdings (NYSE: DK), Noble Energy (NYSE: NBL), and Woodside Petroleum (ASX: WPL). Overall, Zion Oil & Gas pales in comparison to these three stocks and is definitely not a "kosher" investment.

Background on Zion Oil & Gas

According to the company's website, Zion Oil & Gas was founded in April 2000 by John Brown in order to obtain a small onshore petroleum license from the Israeli government. The company was founded on good moral principles, and Brown supposedly has strong business experience from before the founding of Zion. The website makes an interesting note:

"As of March 31, 2013, we have no revenues or operating income and are considered to be a 'development stage' company...We hold three petroleum exploration licenses...covering approximately 218,000 acres of land in onshore northern Israel...Exploration for oil and gas in the deep formations of Northern Israel (i.e. 13,500 feet +), is still in its infancy...exploration risks are inherently very high but Zion is working diligently to find substantial quantities of oil and/or gas onshore in Israel."  

Basically, the company has no revenue whatsoever and has not found any oil in its relatively small and difficult onshore holdings. The large reservoirs of oil and natural gas discussed earlier are off of Israel's shore.

Zion in comparison to stronger companies

In order to fully comprehend the scope of Zion's futile efforts so far, take a look at the company's stock performance since Zion first went public on January 3, 2007:

<img alt="" src="http://media.ycharts.com/charts/64a444a8029ec7ecc032074acab36507.png" />

NBL data by YCharts

Zion stock has lost a staggering 85% of its value since its Initial Public Offering (IPO), while both Delek Holdings and Noble Energy have appreciated well over 100%. Zion did not have the fundamentals to back up its IPO stock price, and that is reflected in the stock's miserable performance. The company is simply living in a dream that one day, it might possibly find oil and gas reserves in its holdings, while it continues to drill away in a quite difficult and economically expensive land. This pie-in-the-sky dream might someday come to fruition, but as of now, there is no fulfillment to Zion's promises to shareholders. That's not to say that Zion won't ever be a good investment - all indicators do show, however, that in five years, Zion will most likely still be a "five years from now" type of story.

In contrast, Zion's competitors not only have proven oil reserves, but have been delivering on their promises and producing actual results. Delek is one of Israel's largest companies and is a much more diversified investment than Zion Oil & Gas. Delek is not only involved in energy, but also has large operations in infrastructure and electricity, car manufacturing, and insurance and financial services. Delek has large stakes in actual petroleum and gas finds that have been confirmed. Consider Delek's latest financial report from the first quarter of 2013. Delek crushed analyst estimates and raked in $2.32 billion of revenue. This shows that Delek has been able to crank out solid growth.

Noble Energy also has big stakes in the confirmed oil fields of Israel and has been producing oil off Israel's shores since 2004. The company is arguably one of the better positioned plays on Eastern Mediterranean oceanic resources, as Noble has a potentially lucrative, large presence in Cyprus as well. Noble is one of the largest oil companies in the world and has been doing very well so far this year. The corporation has an impressive profit margin of 25.1% and an operating margin of approximately 27.2%. Noble had reserves of 1.2 billion barrels of oil and assets totaling over $17 billion at year-end 2012.  Zion has precisely zero barrels of proven oil and zero net revenue.

Woodside Petroleum is Australia's largest natural gas and oil company. It's taking the steps necessary to buy in to Israel's proven reserves. Although the company's stock chart has remained relatively flat since Zion's IPO, it certainly hasn't lost 85% of its value and, like Delek and Noble Energy, sports a dividend payment. Dividends (or the lack thereof) are yet another reason why Zion should not be on your shortlist.

<img alt="" src="http://www.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=WPL&uf=7168&type=2&size=2&sid=141634&style=1013&freq=1&time=8&rand=1025043821&ma=1&maval=50&lf=1&lf2=4&lf3=0&height=444&width=579&mocktick=1" />

Woodside Petroleum had a record-breaking 2012, with a 30% increase in sales revenue, a 98% increase in net profit, and a 55% increase in operating cash flow. Woodside is definitely going in the right direction and has even more room to grow.

The Bottom Line

If I were to invest in Zion Oil & Gas, it would only be a very small experimental position in the stock because the company is a speculative play on the natural gas boom and potential in Israel. Zion Oil & Gas is not a strong, viable company at this point. There is no compelling reason to jump on the ship at this point. If any important positive developments do occur within the company, there would still be plenty of room left for upside to buy into Zion. I would strongly caution not buying a large position in the company, if you even want to risk your money at all. Zion Oil & Gas is a definitive example of a company that puts the "long" in "long-term investment." In contrast, Delek, Noble Energy, and Woodside Petroleum have not only been more successful than Zion, but have much better prospects for the future.

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Evan Buck has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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