Tomer Energy in the first quarter: more Tamar gas, less free cash

The first quarter for Tomer Energy looks positive if the reader stops at net profit, but it supports a more cautious conclusion: more Tamar gas still does not mean more free cash for shareholders. Tamar gas sales rose 6% to 2.76 BCM and net profit rose to $973 thousand, yet royalty revenue fell to $6.9 million and operating cash flow slipped to $3.8 million. Part of the gap came from a lower average gas price and from current revenue offsets by some royalty payers in connection with Tamar SW, so the quarter still does not prove that the expanded Tamar asset is already producing a higher royalty stream for the company. At the same time, bond principal and interest consumed $6.7 million in the quarter, and the company used released deposits to end the period with only a small decline in cash. This is not an immediate liquidity problem, because the company is still inside its bond covenants, but it does define the constraint: accounting profit can improve while free cash remains tight. The 2026 proof points are completion of the compressor upgrade, the start of additional volumes to Blue Ocean Energy, the Dalia quantity-adjustment mechanism, and whether Tamar SW stops being a source of offsets and becomes a clearer royalty asset.

Tomer Is A Royalty Vehicle, So Profit Alone Misleads

Tomer Energy is a royalty company, not an operating gas partner. It is entitled to an overriding royalty from the royalty payers' interests in the Tamar and Dalit leases, but it does not operate the reservoir, does not decide the development pace, and does not bear the exploration, development, production or marketing costs of the Tamar partners. That makes it an almost pure royalty-cash vehicle: low operating expenses, one central asset, and bond debt that determines how much of the royalty flow actually reaches shareholders.

The company's weighted overriding royalty rate is 5.03% of the royalty payers' royalty-bearing share in Tamar and Dalit, and 4.45% on a wellhead-adjusted basis after the state advance royalty adjustment. During the reporting period, the royalty payers, excluding Dor Gas, paid at an approximately 4.3% rate out of their royalty-bearing share, while Dor Gas paid at approximately 5.5%. The company does not sell gas itself. It receives a derivative of sales, pricing mechanisms, regulatory decisions and settlements among the reservoir right holders.

In the prior annual Deep TASE analysis, the focus was the gap between improving profit and free cash after debt and dividend. The first quarter did not close that gap. It added a new layer: Tamar gas volume rose in a period when royalty revenue fell, and part of the volume increase came from an unusual security backdrop, after production at Leviathan and Karish stopped and Tamar supplied some of their customers.

Net profit rose from $572 thousand in the comparable quarter to $973 thousand, an increase of about 70%, but operating profit barely moved, at $2.10 million versus $2.07 million. Royalty revenue fell about 1.9% despite an approximately 6% increase in Tamar gas sales. Two forces pulled revenue down: a roughly 5% decline in the average natural-gas price, mainly because lower Brent prices affected export gas prices, and current revenue offsets by some royalty payers in connection with Tamar SW.

The petroleum-profits levy and tax also helped the bottom line without proving full royalty improvement. The levy expense fell to $2.9 million from $3.2 million in the comparable quarter, because Tamar project profits for levy purposes, calculated on a cash basis, were lower, mainly due to lower receipts from Tamar partners' customers. Tax expense fell to $262 thousand, partly because deferred tax income reflected the gap between the shekel tax measurement base and the US-dollar reporting base after the dollar weakened about 1% against the shekel. This is why the quarter looks better in profit than in royalty revenue and cash.

Tamar Advanced, But The Additional Cash Has Not Arrived

The most positive operating event in the quarter is the completion of the first stage of the Tamar expansion project on February 9, 2026. That stage includes investment in a third pipeline from the wells to the production platform, offshore infrastructure, the platform and the Ashdod receiving facility. But the compressor upgrade, which together with the first stage is expected to lift Tamar's maximum daily production capacity to up to about 1.6 BCF per day, was not yet complete at the report approval date. The operator expects completion in the coming weeks, with the caveat that the security situation may delay completion.

That makes 2026 a proof year. Tamar has already passed an important infrastructure milestone, but the company needs to see that capacity turn into additional volumes, sufficiently strong selling prices, and royalties that are not cut by pricing mechanisms, offsets or export constraints.

Blue Ocean Energy is the clearest example. In April 2026 the Tamar partners notified Blue Ocean Energy that force-majeure conditions had created availability problems for equipment and contractors, so the start date for the additional volumes was postponed to a date still to be announced. The Ashdod-Ashkelon offshore pipeline section, which is needed for upgrading export transmission capacity to the EMG reception point in Ashkelon, is expected to be completed in the third quarter of 2026. The company says this delay has no material effect on it as of the report approval date, but at the thesis level it is a reminder that value from Tamar is measured by a chain of production, transmission, customer, price and collection.

The Dalia contract also moved into a monitoring phase. Because the parties did not reach agreement on the operating-price adjustment by the dates set in the contract, the quantity-adjustment mechanism will take effect on June 30, 2026. There is not enough disclosure to quantify the effect on the company, but it is a sign that part of Tamar's contract base continues to change through commercial terms, not only through sales volumes.

Tamar SW adds the most important finding on royalty quality. In April 2026 the Tamar partners signed an agreement with the former holders of the Eran license, under which the Tamar partners will pay total consideration of about $9.1 million on a 100% reservoir basis in exchange for a final and full waiver of all claims connected with Tamar SW. In May 2026, approval was also received to change the Tamar lease boundaries so that they include the entire Tamar SW area. At the reservoir level, those steps reduce uncertainty. At the company level, however, the dispute has not disappeared from the numbers, because the decline in quarterly royalty revenue is explained mainly by current revenue offsets by some royalty payers in connection with Tamar SW.

That is exactly the friction highlighted in the Tamar SW follow-up analysis: Tamar SW may become a clearer geological and economic asset for the Tamar partners, but for the company the key question is whether income from it flows through its royalty right without offsets or exclusions. The offset is not fully quantified, so SW still cannot be treated as full cash-flow upside. At this stage, it advanced in the reservoir's rights structure, but it still reduces the company's reported revenue.

Debt Determines How Much Cash Reaches Shareholders

The all-in cash view asks what remains after the period's actual cash uses, and this quarter is less comfortable than the income statement. Operating cash flow was $3.8 million, but bond principal and interest payments were $6.7 million. The gap was closed mainly through the release of short-term deposits, so cash and cash equivalents fell by only $301 thousand. Cash remained relatively stable not because the quarter generated enough cash after debt service, but because the company used existing deposits.

The company complies with its bond covenants. The expected debt-service coverage ratio for the test period beginning July 1, 2026 is 1:1.33, above the 1:1.05 minimum and above the 1:1.20 threshold that is a key condition for dividend distributions. Economic equity stands at about $177 million, compared with a requirement not to fall below $51 million for two consecutive quarters.

But covenant compliance is not surplus cash for distributions. In the comparable quarter of 2025, the company declared a $4 million dividend, while no distribution was declared in the current quarter. In addition, the company expects to pay about NIS 6.6 million in May 2026, including interest and linkage, under a settlement with the Israel Tax Authority regarding the petroleum-profits levy for prior tax years. That payment does not by itself change the company's ability to meet the bond schedule, but it further narrows flexibility around distributions and new investments.

The bond structure adds a longer monitoring point. Series A is US-dollar-linked, bears fixed annual interest of 5.48%, and has semiannual payments through August 2028, when 50.18% of the remaining principal is due. As long as Tamar produces cash according to the reserve report, this is not a survival story. But if Tamar SW continues to offset revenue, if additional volumes are delayed, or if regulatory and security constraints hurt exports, the debt layer will determine how much of the profit reaches shareholders.

Conclusion

The first quarter strengthens a mixed but clear conclusion: Tamar is a more active and stronger asset than it was at the beginning of 2025, but the company still has not proven that additional capacity and the SW framework translate into higher free cash. Net profit rose, but royalty revenue fell, operating cash flow weakened, and debt service consumed more cash than operations generated in the quarter. The near-term question is therefore not whether Tamar sells more gas. It is whether those sales reach the company after price, offsets, levy, tax and debt.

Over the next two to four quarters, the market is likely to measure four things: completion of the compressor upgrade and actual capacity, the start of additional supply to Blue Ocean Energy, a halt to or clear quantification of Tamar SW offsets, and the company's ability to maintain comfortable coverage after tax and debt service. If all four move together, the first quarter may look in hindsight like a transition quarter before better cash generation. If they remain split, the higher net profit will not be enough to change the read on the company as a royalty vehicle dependent on one asset, a demanding debt schedule, and a royalty entitlement that still needs proof.