Executive Summary / Key Takeaways

• Structural Margin Inflection: Delek US Holdings is undergoing a fundamental transformation through its Enterprise Optimization Plan (EOP) and Small Refinery Exemptions (SREs), delivering a $180 million annual run rate of improvements that are primarily margin-driven rather than cyclical, as evidenced by Q3 2025's refining EBITDA surge of 3,525% year-over-year.

• Sum-of-Parts Value Unlock: The deliberate separation of Delek Logistics Partners (DKL) from the parent—through strategic dropdowns, acquisitions, and economic independence—is unlocking substantial value that remains obscured in the consolidated valuation, with DKL's third-party EBITDA contribution reaching 80% and its asset base growing 34% in nine months.

• Regulatory Arbitrage as Moat: The EPA's approval of SREs for 2019-2024 compliance years delivered a $280.8 million one-time benefit in Q3 2025, but more importantly, management's confidence in 100% SRE qualification for 2025 and beyond represents a structural reduction in what has been Delek's highest operational cost.

• Scale Disadvantage Persists: Despite operational improvements, Delek remains a niche player with 302,000 bpd of refining capacity against giants like Valero (VLO) (3.2 million bpd) and Marathon (MPC) (3 million bpd), leaving it vulnerable to margin compression and limiting its bargaining power with suppliers and customers.

Setting the Scene: From Conglomerate to Focused Energy Player

Delek US Holdings, founded in 2001 and headquartered in Brentwood, Tennessee, spent two decades building a traditional integrated downstream energy business with three segments: refining, logistics, and retail. This structure persisted until July 2024, when management initiated a strategic transformation that would fundamentally alter the company's risk profile and value proposition. The sale of 249 retail fuel and convenience stores to FEMSA (FMX) for $385 million, which closed on September 30, 2024, marked a decisive pivot away from low-margin, capital-intensive retail operations toward a focused refining and logistics model.

The timing of this transformation reflects a broader industry inflection point. U.S. refining capacity has remained flat while regulatory pressures from the Renewable Fuel Standard (RFS-2) have escalated compliance costs to what management describes as "one of our highest operational costs." Simultaneously, the energy transition is creating both threats and opportunities—while electric vehicle adoption displaces gasoline demand, it also increases the value of integrated logistics networks that can handle alternative energy feedstocks and wastewater processing.

Delek occupies a niche position in this landscape, controlling approximately 1-2% of U.S. refining capacity through four refineries located in Texas, Arkansas, and Louisiana. This regional focus in the mid-continent and Gulf Coast provides logistical advantages but also exposes the company to intense competition from larger, more efficient rivals. The company's strategic differentiation lies not in scale but in integration: its 63.3% ownership of Delek Logistics Partners provides a captive midstream network that reduces transportation costs and generates stable fee-based revenue, while its three biodiesel facilities offer a hedge against renewable fuel compliance costs.

Strategic Differentiation: The EOP Lifestyle and DKL's Hidden Value

The Enterprise Optimization Plan represents Delek's most significant structural advantage. Management describes EOP not as a temporary cost-cutting program but as a "lifestyle" embedded across the organization, with 73 initiatives running weekly and daily. This cultural shift has delivered tangible results: general and administrative expenses are "pretty much half versus when we started that program," and the annual run rate guidance has been increased to at least $180 million, up from an initial $100 million target. Critically, the majority of these improvements focus on margin enhancement rather than market-dependent factors, creating durability that transcends refining cycle volatility.

The EOP's impact on operations is measurable at the refinery level. El Dorado achieved $1.45 per barrel of margin improvement in Q2 2025 and is trending toward a $2 per barrel run rate target. Big Spring's record throughput and strong capture rates post-turnaround reflect process efficiency improvements that maximize liquid yield recovery and product value, particularly in high-octane gasoline components and premium asphalt grades. These aren't one-time gains but permanent enhancements to the refining system's earnings power.

Delek Logistics Partners constitutes the second pillar of Delek's strategic differentiation. The midstream segment has been systematically expanded through acquisitions: H2O Midstream in September 2024 ($229.7 million) and Gravity Water in January 2025 ($300.8 million). These deals increased DKL's water disposal and recycling capacity in the Permian and Bakken basins, diversified its customer base, and boosted third-party revenue streams. The commissioning of the Libby 2 natural gas processing plant in April 2025, with an estimated $40 million annual EBITDA contribution, further enhances DKL's value proposition.

The strategic separation of DK and DKL accelerated in 2025 through intercompany adjustments that transferred refining-related activities to DK and midstream activities to DKL. These transactions unlocked approximately $250 million of availability under credit facilities and increased DKL's third-party EBITDA contribution to 80% on a pro forma basis. Management's goal is clear: create two economically independent entities that can be valued separately, unlocking the sum-of-parts premium that remains hidden while DK consolidates DKL's results.

Financial Performance: Q3 2025 as Inflection Point

The third quarter of 2025 delivered the clearest evidence of Delek's transformation. Consolidated net income swung to $194.8 million from a $67.5 million loss in Q3 2024, while refining segment EBITDA exploded 3,525% to $464.1 million. This wasn't merely a cyclical recovery driven by crack spreads—though Gulf Coast crack spreads did reach 15-month highs—but a structural improvement amplified by regulatory relief and operational excellence.

The SRE benefit of $280.8 million reduced cost of materials and other by 22.3% year-over-year, but its significance extends beyond the one-time impact. Management expects to monetize approximately $400 million in RIN assets over the next 6-9 months and anticipates 100% of refining capacity will qualify for SREs in 2025. This represents a permanent reduction in a cost that has historically been Delek's largest operational burden, fundamentally altering the margin structure of the refining business.

Refining margins tell the story: the segment margin increased 272.6% to $616.7 million, with margin percentage rising from 5.5% to 21.7%. Crude utilization reached 100.6% in Q3 2025, up from 97.8% a year earlier, demonstrating that operational improvements are enabling the system to capture more value from existing capacity. Krotz Springs achieved a "record throughput quarter," while Tyler, El Dorado, and Big Spring all demonstrated strong operational performance.

The logistics segment contributed $102.0 million in EBITDA, up 48.7% year-over-year, driven by $7.6 million from H2O Midstream and $9.1 million from Gravity acquisitions. DKL's total assets grew 34% to $2.75 billion in nine months, reflecting the segment's expansion trajectory. Wholesale marketing contributed approximately $70 million in Q3 2025, with management citing "structural improvement" through logistics optimization and contract renegotiation.

The balance sheet shows both strength and leverage. Total liquidity stands at $2.3 billion, comprising $1.67 billion in unused credit and $631 million in cash. However, debt-to-equity of 8.22x indicates significant leverage, with total long-term principal indebtedness increasing $414 million in nine months due to DKL's 2033 Notes issuance. The company returned $106.1 million to shareholders through dividends and buybacks in 2025, with $484.2 million remaining on the repurchase authorization—a signal of management's conviction in the stock's discount to intrinsic value.

Outlook and Execution: Confidence vs. Fragility

Management's guidance reflects unusual confidence for a cyclical refining business. The EOP run rate target of $180 million represents a floor rather than a ceiling, with management noting "more upside going into this quarter" and describing Q4 2025 as starting "very well." This confidence stems from the margin-focused nature of EOP initiatives, which include debottlenecking, liquid yield recovery, and product slate optimization that deliver value regardless of market conditions.

Refining throughput guidance for Q4 2025 implies 271,000 to 303,000 bpd system-wide, leveraging the company's 42% distillate capability at a time when distillate cracks are showing strength. Management is explicitly optimistic about distillate demand, citing PADD II inventories "way below their 5-year averages" and expecting agricultural season demand to provide support. This product mix advantage—higher distillate yields than typical Gulf Coast refiners—creates a partial hedge against gasoline demand erosion from EV adoption.

The SRE outlook represents the most significant execution variable. Management's statement that "100% of our refining capacity qualifies for SREs" for 2025 reflects confidence in the legal framework, which they believe "will transcend beyond the current administration." However, this optimism faces headwinds: Delek is litigating the EPA's denial of Krotz Springs' 2024 exemption and the refund of expired RINs for 2019-2023. The EPA's updated framework may subject future petitions to legal challenge, creating uncertainty around timing and approval rates.

Delek Logistics' trajectory adds another layer of execution risk. The $500-520 million EBITDA guidance for 2025 depends on successfully integrating acquisitions, ramping Libby 2 to its $40 million annual contribution, and developing the comprehensive sour gas solution in the Delaware Basin. While management claims DKL's offering is "very unique" with "no one else almost in our area" providing the full suite of gathering, treatment, and processing, competitors like Targa (TRGP) and Kinder Morgan (KMI) have established positions that will challenge DKL's expansion.

Risks: Where the Thesis Can Break

The SRE dependency represents the most material risk to Delek's margin transformation. If the EPA's new framework faces legal challenges or if political priorities shift, the company could lose access to exemptions that management considers essential for economic viability. The cost of RINs compliance has historically been Delek's highest operational expense, and without SRE relief, the refining segment's 21.7% margin would compress dramatically. The litigation filed in September and October 2025 against the EPA indicates management is fighting for the full value of 2019-2022 grants, but outcomes remain uncertain.

Scale disadvantage creates persistent vulnerability. Delek's 302,000 bpd capacity is less than 10% of Valero's or Marathon's, resulting in higher per-barrel operating costs and limited bargaining power with crude suppliers and product customers. While EOP initiatives have improved efficiency, they cannot fully offset the structural cost advantages of larger competitors. In a low-margin environment, this scale gap could force Delek to operate at a loss while majors remain profitable, threatening market share and financial stability.

Commodity price volatility remains a fundamental risk. Natural gas prices—a significant component of refining operating expenses—are vulnerable to supply hub differentials that can erode crack spread capture. The company's geographic concentration in the Gulf Coast and Permian exposes it to regional price dislocations, while geopolitical instability in the Middle East could disrupt crude supplies and create feedstock availability issues.

The energy transition poses a long-term strategic threat. While Delek's logistics assets are well-positioned to handle alternative feedstocks and its biodiesel facilities provide a hedge, the company's refining-heavy business model faces existential pressure from EV adoption and renewable fuel mandates. Management's confidence in gasoline and diesel demand "not coming off" may prove overly optimistic as fleet electrification accelerates, particularly in Delek's core southwestern markets.

Valuation Context: Discounted Currency with Hidden Assets

At $36.41 per share, Delek trades at a market capitalization of $2.19 billion and an enterprise value of $5.22 billion, representing 0.49x TTM revenue and 11.18x EBITDA. These multiples appear modest relative to the refining sector, but they obscure the underlying value of the DKL stake and the structural margin improvements underway.

The sum-of-parts analysis reveals significant potential value. DK's 63.3% ownership of DKL, which has a market capitalization of approximately $2.5 billion and trades at 8.39x EBITDA, represents a direct equity value of $1.6 billion—nearly 75% of DK's own market cap. Yet DK's consolidated valuation doesn't reflect DKL's independence or its 80% third-party EBITDA contribution, suggesting the market applies a conglomerate discount that management's separation strategy aims to eliminate.

Comparing Delek to direct peers highlights both advantages and disadvantages. HF Sinclair (DINO), the closest comparable at 700,000 bpd capacity, trades at 8.39x EBITDA with superior operating margins (7.78% vs. Delek's 11.73%—though Delek's includes SRE benefits). Valero (VLO) and Marathon (MPC) trade at 9.58x and 10.79x EBITDA respectively, reflecting their scale advantages and diversified operations. Delek's leverage ratio (debt-to-equity 8.22x) significantly exceeds peers (VLO: 0.40x, MPC: 1.43x), justifying a valuation discount but also creating potential for equity expansion as debt is reduced with SRE proceeds.

The expected $400 million in SRE monetization over 6-9 months represents 18% of the current market cap, providing near-term catalysts for value realization. Management's commitment to "countercyclical" share buybacks—having executed the highest total return yield among refining peers over the past 12 months—suggests they view the stock as substantially discounted to intrinsic value.

Conclusion: Structural Transformation Meets Valuation Disconnect

Delek US Holdings has engineered a genuine margin inflection that transcends the typical refining cycle. The combination of EOP's $180 million run rate of structural improvements, SRE relief that eliminates the company's highest operational cost, and the strategic separation of DKL creates a compelling value proposition that the market has yet to fully recognize. Q3 2025's results—3,525% refining EBITDA growth and a swing to $194.8 million net income—demonstrate that these initiatives are delivering tangible results.

The investment thesis hinges on two variables: the durability of SRE relief and the successful completion of DKL's economic independence. If management's confidence in 100% SRE qualification for 2025 proves justified and the litigation resolves favorably, Delek's margin structure will be permanently transformed. If DKL achieves standalone valuation as a premier Permian midstream provider, the sum-of-parts discount should collapse, unlocking substantial value for DK shareholders.

The primary risk is that this transformation occurs within a business facing secular headwinds from scale disadvantages and the energy transition. While EOP and SREs have improved profitability, they haven't changed Delek's position as a small, leveraged refiner in a consolidating industry. For investors, the question is whether the near-term value unlock from structural improvements outweighs the long-term strategic challenges—a calculation that depends heavily on execution of the separation strategy and the regulatory environment for small refinery exemptions.