Delek Logistics Partners, LP (NYSE:DKL) has reported another strong quarter, exceeding $100 million in quarterly EBITDA. The partnership's consistent performance and strategic initiatives have positioned it well for continued growth and value creation for unitholders.

Business Overview

Delek Logistics Partners, LP is a midstream energy company that provides gathering, pipeline, storage, wholesale marketing, terminalling and other transportation services primarily for crude oil, natural gas, and refined products customers. The partnership operates in the Permian Basin, including the Delaware sub-basin, as well as other select areas in the Gulf Coast region.

A majority of Delek Logistics' existing assets are integral to and dependent upon the success of its sponsor, Delek US Holdings, Inc. (Delek Holdings), as many of its assets are contracted exclusively to Delek Holdings in support of the latter's refining operations. However, the partnership has been actively diversifying its customer base and expanding its third-party business, which now accounts for approximately 50% of its EBITDA.

Gathering and Processing Segment

The partnership's gathering and processing segment consists of the Midland Gathering Assets and the Delaware Gathering Assets. The Midland Gathering Assets support Delek Logistics' crude oil gathering activities, primarily serving Delek Holdings' refining needs throughout the Permian Basin. The Delaware Gathering Assets support the partnership's crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico, serving primarily third-party producers and customers.

Wholesale Marketing and Terminalling Segment

This segment provides wholesale marketing and terminalling services to Delek Holdings' refining operations and to independent third parties. In this segment, Delek Logistics takes ownership of the products and is exposed to market risks related to the volatility of commodity and refined product prices.

Storage and Transportation Segment

The assets in this segment consist of tanks, offloading facilities, trucks and ancillary assets, which provide crude oil, intermediate and refined products transportation and storage services primarily in support of Delek Holdings' refining operations.

Investments in Pipeline Joint Ventures

Delek Logistics owns interests in three joint venture pipeline projects that provide crude oil and refined product transportation services to third parties and Delek Holdings.

Financials

For the full year 2023, Delek Logistics reported annual net income of $126,236,000, annual revenue of $1,020,409,000, annual operating cash flow of $234,321,000, and annual free cash flow of $133,973,000.

In the first quarter of 2024, the partnership reported EBITDA of $101.5 million, up from $93.2 million in the same period of 2023. Distributable cash flow was $68 million, resulting in a distribution coverage ratio of 1.35x.

The gathering and processing segment reported EBITDA of $57.8 million in Q1 2024, compared to $55.4 million in Q1 2023, driven by higher throughput from Delek Logistics' Permian Basin assets. The wholesale marketing and terminalling segment EBITDA increased to $25.3 million from $22.0 million, primarily due to higher terminalling utilization. The storage and transportation segment EBITDA rose to $18.1 million from $13.4 million, mainly due to higher storage and transportation rates. The investments in pipeline joint ventures segment contributed $8.5 million in Q1 2024, up from $6.3 million in the prior-year quarter.

Liquidity

Delek Logistics has taken several steps to strengthen its financial position and flexibility. In March 2024, the partnership completed a public offering of 3.6 million common units, raising $132.3 million in net proceeds, which were used to repay a portion of the outstanding borrowings under the DKL Revolving Facility.

Additionally, the partnership issued $650 million of 8.625% senior notes due 2029 and used the proceeds to redeem the 2025 Notes, pay off the DKL Term Loan Facility, and repay a portion of the DKL Revolving Facility. These transactions improved the partnership's liquidity to approximately $800 million, up from $300 million prior to the offerings.

As a result of these actions, Delek Logistics' leverage ratio improved to 4.01 from 4.34 in the prior quarter. The partnership sees a pathway to continued leverage reduction through the balance of 2024.

Outlook

Delek Logistics remains focused on generating stable cash flows, growing its business, and maintaining an attractive distribution profile for its unitholders. The partnership continues to evaluate both organic and inorganic growth opportunities, leveraging its strong position in the Permian Basin.

In the gathering and processing segment, the partnership sees significant growth potential in both its Midland Gathering system and Delaware Gathering assets. The Midland Gathering system, which has gathered up to 230,000 barrels per day and has around 350,000 acres of dedicated acreage contracted until 2030, provides a solid growth engine. The Delaware Gathering business, built both organically and inorganically, offers complete crude, gas, and water gathering services to customers and has substantial growth opportunities.

Delek Logistics is also focused on renewing and extending its long-term, fee-based commercial agreements with Delek Holdings, including those related to the Tyler and El Dorado refineries. The partnership is working closely with Delek Holdings to ensure the continued value of these agreements for both parties.

Additionally, the partnership remains opportunistic regarding potential acquisitions that would complement its existing asset base and provide attractive returns for unitholders. The partnership's improved liquidity position provides it with the financial flexibility to pursue such opportunities.

Risks and Challenges

While Delek Logistics has demonstrated its ability to deliver consistent performance, the partnership faces several risks and challenges, including:

1. Dependence on Delek Holdings: A majority of Delek Logistics' assets are contracted exclusively to Delek Holdings, making the partnership's performance heavily dependent on the success and operations of its sponsor.

2. Commodity Price Volatility: The partnership's wholesale marketing and terminalling segment is exposed to fluctuations in commodity and refined product prices, which can impact its operating margins.

3. Regulatory and Environmental Compliance: Delek Logistics is subject to extensive federal, state, and local environmental and safety laws and regulations, which could result in increased compliance costs and potential liabilities.

4. Competition and Industry Dynamics: The midstream energy industry is highly competitive, and the partnership faces competition from other providers of logistics services in the regions where it operates.

5. Integration and Execution Risks: The partnership's growth strategy, which includes both organic and inorganic initiatives, carries risks related to the successful integration and execution of these projects.

Conclusion

Delek Logistics Partners, LP has delivered consistent financial and operational performance, exceeding $100 million in quarterly EBITDA. The partnership's strategic initiatives, including the recent debt and equity offerings, have strengthened its balance sheet and provided the financial flexibility to pursue growth opportunities.

Delek Logistics' focus on generating stable cash flows, diversifying its customer base, and maintaining an attractive distribution profile for unitholders positions the partnership well for the future. While the partnership faces certain risks and challenges, its strong market position, operational expertise, and financial discipline suggest it is well-equipped to navigate the evolving industry landscape and continue creating value for its stakeholders.