Delek Logistics Partners, LP (DKL) has been on a transformative journey over the past year, solidifying its position as a premier midstream service provider in the prolific Permian Basin. The partnership's strategic initiatives, disciplined capital allocation, and operational excellence have positioned it for continued growth and increased economic separation from its sponsor, Delek US Holdings, Inc. (DK).
Business Overview
Delek Logistics Partners, LP is a midstream energy master limited partnership that was formed in 2012 by Delek US Holdings, Inc. and its subsidiary Delek Logistics GP, LLC, the Partnership's general partner. The partnership provides gathering, pipeline, and other transportation services primarily for crude oil and natural gas customers, as well as storage, wholesale marketing, and terminalling services for intermediate and refined product customers. Delek Logistics also offers water disposal and recycling services through its owned assets and joint ventures located primarily in the Permian Basin, including the Delaware sub-basin, and other select areas in the Gulf Coast region.
A majority of Delek Logistics' existing assets are integral to and dependent upon the success of Delek US Holdings' refining operations, as many of the partnership's assets are contracted exclusively to Delek US in support of its Tyler, Texas; El Dorado, Arkansas; and Big Spring, Texas refineries. However, Delek Logistics has been actively diversifying its customer base and revenue streams, with a growing percentage of third-party volumes and cash flows.
Over the years, the Partnership has undertaken several strategic acquisitions and investments to expand its asset base and service offerings. In March 2018, the Partnership acquired the Big Spring Logistics Assets from Delek Holdings. In March 2020, the Partnership acquired a crude oil gathering system located in Howard, Borden and Martin Counties, Texas from Delek Holdings. In May 2020, the Partnership acquired Delek Trucking, LLC consisting of certain leased and owned tractors and trailers and related assets from Delek Holdings.
The Partnership has also made investments in various joint ventures, including the RIO Pipeline, Caddo Pipeline, Red River Pipeline and Wink to Webster Pipeline, to expand its crude oil and refined product pipeline transportation capabilities. These joint venture investments have provided the Partnership strategic benefits in terms of pipeline access and connectivity for its customers while also generating financial returns.
Despite the Partnership's reliance on Delek Holdings as its primary customer, it has faced certain challenges over the years. The Partnership has had to navigate volatility in commodity prices, the COVID-19 pandemic, and other industry and economic factors that have impacted its operations and financial performance from time to time. However, the Partnership has demonstrated its ability to manage these challenges through strategic initiatives, cost control measures, and by leveraging its integrated asset base and long-term commercial agreements with Delek Holdings.
Transformational 2024
The year 2024 was a transformational period for Delek Logistics, as the partnership made significant strides in becoming an independent, full-suite midstream service provider in the Permian Basin. Some of the key highlights include:
1. Acquisitions and Joint Venture Investments: - Acquired H2O Midstream, expanding the partnership's water disposal and recycling operations in the Midland Basin. - Acquired a 50% equity interest in Wink to Webster Holdings, which includes a 15.6% indirect interest in the Wink to Webster crude oil pipeline system. - Announced the final investment decision (FID) to build a new natural gas processing plant in the Delaware Basin, with acid gas injection (AGI) and sour gas treating capabilities.
2. Commercial Agreements with Delek US: - Amended and extended key commercial agreements with Delek US Holdings, providing greater cash flow visibility and contract durations of up to seven years. - Entered into an assignment agreement with Delek US, whereby the partnership assigned its rights and obligations under the Big Spring Refinery Marketing Agreement to Delek US.
3. Balance Sheet Optimization and Equity Offerings: - Raised approximately $298 million through two separate primary equity offerings to fund accretive growth projects. - Redeemed all outstanding preferred units issued in connection with the H2O Midstream acquisition.
4. Operational Excellence and Cost Management: - Completed a major turnaround at the Cross Springs Refinery, demonstrating improved crude capacity, product mix, and liquid yield recovery capabilities. - Implemented a zero-based budgeting initiative, allowing the partnership to save around $100 million in costs.
These strategic moves have significantly enhanced Delek Logistics' position as a premier midstream service provider in the Permian Basin, while also increasing its economic separation from Delek US Holdings. The partnership's commitment to operational excellence, disciplined capital allocation, and strategic growth initiatives have positioned it for continued success.
Financial Performance and Liquidity
For the full year 2024, Delek Logistics reported net income of $142.69 million and Adjusted EBITDA of $394.70 million, representing a year-over-year increase of 13.0% and 2.5%, respectively. The partnership's distributable cash flow (DCF) for the year amounted to $255.80 million, resulting in a DCF coverage ratio of approximately 1.2x.
Total revenue for 2024 was $940.64 million, with operating cash flow of $206.34 million and free cash flow of $74.55 million. In the most recent quarter (Q4 2024), DKL reported revenue of $209.86 million and net income of $35.31 million.
As of December 31, 2024, Delek Logistics had total debt of $1.89 billion and a net debt position of $1.87 billion. The partnership's leverage ratio, as measured by net debt to Adjusted EBITDA, stood at 4.7x, well within its target range. Delek Logistics' solid financial position and ample liquidity, with $720 million in total available liquidity as of the end of 2024, provide the flexibility to fund its growth initiatives and maintain its commitment to returning capital to unitholders.
The partnership's liquidity position is further strengthened by its $1.15 billion revolving credit facility, of which $714.6 million was unused as of December 31, 2024. DKL's current ratio stands at 1.64, and its quick ratio is 1.58, indicating a healthy short-term liquidity position. The partnership held $5.38 million in cash at the end of 2024.
Segment Performance
Delek Logistics Partners operates through four reportable business segments:
1. Gathering and Processing: This segment reported net revenues of $364.72 million in 2024, a decrease of 1.7% compared to 2023. However, segment EBITDA increased by 3.9% to $207.15 million, driven by incremental EBITDA from the H2O Midstream acquisition, partially offset by the impact of sales-type lease accounting.
2. Wholesale Marketing and Terminalling: Net revenues for this segment decreased 10.7% to $451.52 million in 2024, primarily due to lower wholesale marketing revenues driven by decreased sales prices and RINs revenue. Segment EBITDA declined 13.9% to $91.73 million.
3. Storage and Transportation: Net revenues for this segment decreased 13.4% to $124.39 million in 2024, mainly attributable to throughput and storage fees being recorded as interest income under sales-type lease accounting. Segment EBITDA decreased 24.3% to $48.33 million.
4. Investments in Pipeline Joint Ventures: Income from these equity method investments increased 37.8% to $43.30 million in 2024, primarily due to the acquisition of the Wink to Webster investment and increased throughput at some of the other joint ventures.
Guidance and Outlook
For the full year 2025, Delek Logistics provided guidance for Adjusted EBITDA in the range of $480 million to $520 million, representing approximately 20% growth over the partnership's 2024 Adjusted EBITDA. This guidance reflects the expected benefits from the H2O Midstream and Wink to Webster acquisitions, the ramp-up of the new natural gas processing plant in the Delaware Basin, and continued operational excellence across the partnership's asset base.
The partnership expects to generate $500 million in EBITDA for 2025, representing significant growth from the $400 million EBITDA achieved in 2024. DKL's third-party EBITDA contribution increased from 40% to 70% in 2024, demonstrating its success in diversifying its revenue streams.
DKL also announced plans to complete the LiviGas processing complex expansion in the first half of 2025 and made a final investment decision on an acid gas injection project at the Libya complex in December 2024.
Delek Logistics' focus on strategic capital deployment, operational optimization, and disciplined financial management has positioned the partnership for continued growth and value creation for its unitholders. The partnership's commitment to its "full suite" midstream services strategy in the Permian Basin, combined with its strong balance sheet and ample liquidity, provides a solid foundation for future success.
Risks and Challenges
As with any business, Delek Logistics faces a variety of risks and challenges that could impact its financial performance and growth prospects. These include:
1. Reliance on Delek US Holdings: A significant portion of Delek Logistics' revenue and cash flow is derived from commercial agreements with Delek US Holdings, making the partnership's performance heavily dependent on the success and financial condition of its sponsor.
2. Commodity Price Volatility: Fluctuations in crude oil, natural gas, and refined product prices can affect the partnership's wholesale marketing and terminalling operations, which are exposed to commodity price risk.
3. Regulatory and Environmental Compliance: Delek Logistics is subject to extensive federal, state, and local regulations related to environmental protection, pipeline integrity, and safety, which could result in increased compliance costs and operational disruptions.
4. Integration and Execution Risks: The successful integration and execution of acquisitions, such as H2O Midstream and the Wink to Webster investment, are critical to realizing the expected benefits and synergies.
5. Competition: Delek Logistics faces competition from other midstream companies in the Permian Basin and surrounding regions, which could impact the partnership's ability to secure new contracts and maintain market share.
Despite these risks, Delek Logistics' management team has demonstrated its ability to navigate challenging market conditions and execute on its strategic initiatives. The partnership's focus on operational excellence, financial discipline, and strategic growth will be key to overcoming these challenges and delivering value to its unitholders.
Conclusion
Delek Logistics Partners, LP has emerged as a premier midstream service provider in the Permian Basin, leveraging its strategic acquisitions, disciplined capital allocation, and operational expertise to drive growth and increased economic separation from its sponsor, Delek US Holdings. The partnership's 2024 transformational initiatives, including the H2O Midstream and Wink to Webster acquisitions, as well as the expansion of its natural gas processing capabilities, have positioned Delek Logistics for continued success.
With a strong balance sheet, ample liquidity, and a solid outlook for 2025, Delek Logistics is well-equipped to capitalize on the robust activity in the Permian Basin and further enhance its position as a trusted, full-suite midstream services provider. As the partnership continues to diversify its customer base and revenue streams, investors can look forward to Delek Logistics' ongoing efforts to create long-term value and deliver consistent returns.