Delek US Holdings, Inc. (DK): Refining and Logistics Strength Offsets Retail Headwinds

Published on September 24, 2024 | Ticker: DK

Delek US Holdings, Inc. (DK) is an integrated downstream energy company focused on petroleum refining, the transportation, storage and wholesale distribution of crude oil, intermediate and refined products, and convenience store retailing. The company operates through three reportable segments: Refining, Logistics, and Retail.

Financials

In the fiscal year 2023, Delek reported annual net income of $198.0 million, annual revenue of $16,917.4 million, annual operating cash flow of $1,028.5 million, and annual free cash flow of $604.6 million. The company's performance in the first quarter of 2024 showcased the strength of its Refining and Logistics segments, offsetting headwinds in the Retail business.

Refining Segment Shines Amidst Volatile Market Conditions

Delek's Refining segment, which includes four refineries with a combined nameplate capacity of 302,000 barrels per day (bpd), delivered a strong performance in the first quarter of 2024. The segment's EBITDA increased by $91.0 million compared to the prior-year period, driven by higher crack spreads and improved capture rates, partially offset by increased operating expenses.

The Tyler, Texas refinery reported a production margin of $15.72 per barrel and operating expenses of $5.28 per barrel in the first quarter. The El Dorado, Arkansas refinery achieved a production margin of $9.29 per barrel and operating expenses of $4.72 per barrel. The Big Spring, Texas refinery, which faced some weather-related challenges, reported a production margin of $12.87 per barrel, including an estimated $3.50 per barrel impact from freeze-related events, and operating expenses of $8.08 per barrel. The Krotz Springs, Louisiana refinery recorded a production margin of $12.85 per barrel, including an estimated $1.50 per barrel impact from planned maintenance, and operating expenses of $5.94 per barrel.

Delek's management team remains focused on operational excellence, safety, and cost optimization initiatives across the Refining segment. The company expects its refining system to operate within a throughput range of 299,000 to 312,000 bpd in the second quarter of 2024.

Logistics Segment Delivers Consistent Performance

Delek's Logistics segment, which includes the operations of Delek Logistics Partners, LP (DKL), continued to be a strong contributor to the company's overall performance. The segment's EBITDA increased by $8.3 million, or 9.1%, in the first quarter of 2024 compared to the prior-year period.

The Logistics segment's gathering and processing business owns or leases capacity on approximately 398 miles of crude oil transportation pipelines, 406 miles of refined product pipelines, and a 1,400-mile crude oil gathering system. The segment also owns or leases associated crude oil storage tanks with an aggregate of approximately 10.0 million barrels of active shell capacity, and owns or leases 199 tractors and 353 trailers used to haul primarily crude oil and other products.

During the quarter, Delek Logistics completed a public offering of its common units, raising $132.3 million in net proceeds, which were used to repay a portion of the outstanding borrowings under the Delek Logistics Revolving Facility. Additionally, Delek Logistics issued $650.0 million in aggregate principal amount of 8.625% Senior Notes due 2029, with the net proceeds used to redeem the Delek Logistics 2025 Notes, pay off the Delek Logistics Term Loan Facility, and repay a portion of the outstanding borrowings under the Delek Logistics Revolving Facility. These transactions have strengthened the Logistics segment's balance sheet and improved its liquidity position.

Retail Segment Faces Headwinds

Delek's Retail segment, which operates 250 owned and leased convenience store sites primarily in West Texas and New Mexico, faced some challenges in the first quarter of 2024. Revenues for the Retail segment decreased by $11.5 million, or 5.6%, compared to the prior-year period, primarily due to a decrease in total fuel sales and merchandise sales.

Retail fuel sales were $122.8 million, with an average retail fuel margin of $0.290 per gallon. Merchandise sales were $70.7 million, with a merchandise margin of 33.5%. The segment's EBITDA increased by $0.1 million, or 1.6%, compared to the first quarter of 2023, driven by the increase in average fuel margin and a decrease in merchandise sales.

Management has initiated a process to explore strategic opportunities for the Retail segment, with the goal of unlocking the inherent value of this business. The company has engaged investment bankers to review these strategic options, and further details are expected to be provided in the near future.

Liquidity

Delek's capital allocation strategy focuses on rewarding shareholders through a consistent and growing dividend, maintaining a strong balance sheet, and pursuing strategic investments and acquisitions. During the first quarter of 2024, the company paid $15.7 million in dividends and ended the quarter with a cash balance of $753.4 million and total liquidity of $2.2 billion, including $1,424.3 million in unused credit commitments.

The company's total long-term indebtedness, net of deferred financing costs and debt discount, was $2,496.9 million as of March 31, 2024. Delek's debt structure includes the Delek Term Loan Credit Facility, the Delek Logistics Revolving Facility, the Delek Logistics 2028 Notes, and the Delek Logistics 2029 Notes, among other instruments. The company remains committed to maintaining a strong balance sheet and improving its financial flexibility.

Outlook

For the full year 2024, Delek expects capital expenditures to be approximately $330 million, with a focus on regulatory, sustaining, and growth projects across its Refining, Logistics, and Retail segments. The company also provided guidance for the second quarter of 2024, including an expected range for operating expenses, general and administrative expenses, depreciation and amortization, and net interest expense.

Delek's strategic initiatives are centered around three key priorities: operational excellence, financial strength and flexibility, and unlocking the "sum of the parts" value of its existing business. The company is committed to safe and reliable operations, cost optimization, and strategic investments and acquisitions to diversify its revenue streams and enhance its scale.

In the Logistics segment, Delek is evaluating options to highlight the value of its midstream assets, particularly its Permian Basin operations. The company is also exploring strategic opportunities for its Retail segment to unlock the inherent value of this business. Additionally, Delek is investing in carbon capture technology and continuing its production of biodiesel fuel to align with the evolving energy landscape and regulatory environment.

Conclusion

Delek US Holdings' diversified business model, with its Refining and Logistics segments offsetting headwinds in the Retail segment, demonstrates the company's resilience in the face of market volatility. The company's focus on operational excellence, financial discipline, and strategic initiatives positions it well to navigate the challenges and capitalize on the opportunities in the downstream energy industry. As Delek continues to execute on its strategic priorities, investors will be closely watching the company's ability to unlock the full value of its integrated platform and deliver sustainable growth and shareholder returns.

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Business Overview Delek US Holdings, Inc. was founded in 2001 as an integrated downstream energy business focused on petroleum refining, transportation, storage, and wholesale distribution of crude oil, intermediate and refined products. The company was initially formed through the acquisition of the Tyler, Texas refinery. In 2005, Delek significantly expanded its operations by acquiring Alon USA Energy, Inc., which included the El Dorado, Arkansas refinery, the Big Spring, Texas refinery, and the Krotz Springs, Louisiana refinery.