Executive Summary / Key Takeaways

• Strategic Independence in Motion: DKL is executing a deliberate transformation from a captive logistics provider for Delek US Holdings into an independent, full-suite midstream company, with third-party cash flow contribution increasing from 70% to approximately 80% pro forma through targeted acquisitions and contract restructurings.

• Permian Basin Differentiation: The company is building a unique competitive moat in the Permian through integrated crude, natural gas, and water services, particularly enhanced sour gas handling capabilities at the new Libby 2 plant that management describes as a "unique offering" with a "long runway of growth" in the Delaware Basin.

• Segment Divergence Signals Strategy Success: Gathering & Processing segment EBITDA surged 64% in Q3 2025, driven by the H2O Midstream and Gravity Water acquisitions, while legacy Wholesale Marketing and Storage & Transportation segments declined due to intentional contract restructurings, validating the strategic pivot toward higher-growth, fee-based services.

• Distribution Growth Meets Execution: DKL's 51st consecutive quarterly distribution increase to $1.12 per unit demonstrates management's confidence in cash flow durability, supported by record crude gathering volumes and a strengthened balance sheet with over $1 billion in liquidity following a $700 million debt issuance.

• Valuation Disconnect Presents Asymmetry: Despite transforming into a diversified midstream platform with peer-leading growth in key segments, DKL trades at a discount to larger midstream peers, suggesting potential upside if the company successfully executes its independence strategy and achieves targeted EBITDA of $500-520 million in 2025.

Setting the Scene: From Captive Provider to Independent Powerhouse

Delek Logistics Partners, LP (DKL) was established in April 2012 as a Delaware limited partnership by Delek US Holdings, Inc. (DK) and its subsidiary, Delek Logistics GP, LLC. For its first decade, DKL functioned primarily as a captive logistics arm, with many contracts exclusively serving Delek Holdings' refineries in Tyler, El Dorado, and Big Spring. This arrangement provided stable, predictable cash flows but limited the partnership's growth potential and market valuation, as investors viewed it as a subsidiary rather than a standalone midstream company.

The midstream energy landscape has undergone structural transformation over the past decade. Producers in the Permian Basin have ramped up production, creating demand for integrated services that handle crude oil, natural gas, and water simultaneously. Regulatory barriers, particularly around salt water disposal (SWD) well permitting in the Delaware Basin, have created natural moats for established players. Simultaneously, midstream investors have increasingly rewarded companies with diversified customer bases and fee-based revenue streams that limit commodity exposure.

DKL's management recognized this inflection point and launched a deliberate strategy to increase third-party revenue, diversify its customer and product mix, and expand its Permian Basin footprint. The company aims to become a full-service crude, natural gas, and water provider, offering a comprehensive solution that differentiates it from competitors who typically specialize in one or two streams. This transformation accelerated dramatically in 2024 and 2025 through a series of strategic acquisitions, contract restructurings, and organic expansions that are fundamentally altering DKL's earnings profile and market positioning.

Technology, Products, and Strategic Differentiation

DKL's competitive advantage centers on its ability to offer integrated midstream services across all three production streams—crude oil, natural gas, and water—within the same geographic footprint. This "full suite" capability is particularly valuable in the Permian Basin, where producers seek operational efficiency through single-provider solutions. The company's assets include pipeline infrastructure, Midland Gathering Assets for crude oil, Midland Water Gathering Assets for disposal and recycling, and Delaware Gathering Assets for crude, natural gas, processing, transportation, and water services.

The crown jewel of DKL's technical differentiation is its expanded sour gas handling capabilities at the Libby 2 gas plant, which adds 100-120 million cubic feet per day of incremental capacity. Management emphasizes that this facility provides a "unique offering" in the Delaware Basin because most competing plants lack comparable sour gas processing capabilities. The company is also progressing on acid gas injection (AGI) capabilities, which further enhances its competitive position. This technical moat matters because it allows DKL to serve producers with challenging gas compositions that competitors cannot handle, creating customer stickiness and supporting premium pricing.

The water disposal and recycling operations, acquired through H2O Midstream ($229.7 million, September 2024) and Gravity Water Intermediate Holdings ($300.8 million, January 2025), provide another layer of differentiation. In the Midland Basin, DKL is integrating these systems to enhance its combined crude and water offering in Howard, Martin, and Glasscock counties. The regulatory environment for SWD wells in the Delaware Basin makes timely permitting "almost impossible," according to management, giving DKL an advantageous position with its existing permitted capacity.

Unlike its Wholesale Marketing segment, where DKL takes ownership of refined products and faces commodity price volatility, the Gathering & Processing and Storage & Transportation segments operate on fee-based models. DKL does not take ownership of the products or crude oil transported, thereby limiting direct exposure to commodity price fluctuations. This structure provides more predictable cash flows and higher valuation multiples from investors who reward fee-based revenue stability.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

DKL's third quarter 2025 results provide clear evidence that the transformation strategy is working, though the financial picture reveals a tale of two businesses. Consolidated net revenues increased 22.1% year-over-year to $261.3 million, while Adjusted EBITDA grew to the upper end of the $500-520 million guidance range. However, the real story lies in the dramatic segment divergence that validates management's strategic pivot.

The Gathering & Processing segment delivered exceptional performance, with net revenues surging 62.2% to $132.2 million and segment EBITDA jumping 64.1% to $69.6 million. This growth was not organic happenstance—it was directly driven by the H2O Midstream and Gravity acquisitions, which contributed $11 million and $20.7 million in revenue respectively, plus $7.6 million and $9.1 million in EBITDA. The segment also achieved record crude gathering volumes for DKL's DTG operations, a trend management expects to continue. This performance demonstrates that DKL's capital deployment into water and gas processing assets is generating immediate returns and establishing new growth vectors.

Conversely, the Wholesale Marketing and Terminalling segment saw EBITDA decline 29.8% to $14.2 million, while Storage and Transportation EBITDA fell 17% to $6.3 million. These declines were not operational failures but deliberate strategic choices. The assignment of the Big Spring refinery marketing agreement back to Delek Holdings and the reclassification of certain throughput fees as interest income under sales-type lease accounting reduced reported revenue but increased economic separation from the parent. As CFO Robert Wright noted, these related-party transactions "enabled us to clean up some of our contracts between DK and DKL" and "move some midstream related activities from DK to DKL," advancing deconsolidation efforts.

The Investments in Pipeline Joint Ventures segment provided stable contribution, with income from equity method investments increasing 40.2% to $21.9 million, primarily due to the Wink to Webster (W2W) dropdown acquired in August 2024. This acquisition contributed $10.4 million in incremental quarterly income and demonstrates DKL's ability to execute accretive dropdown transactions from its parent while diversifying into third-party-serving assets.

General and administrative expenses decreased 71.3% in Q3 2025 to $11.2 million, driven by lower outside services costs, showing management's focus on cost discipline. Depreciation and amortization increased 24.6% year-to-date, reflecting the expanded asset base from acquisitions. Net cash from operating activities increased $37.5 million year-to-date, while investing activities consumed $97.1 million more due to the Gravity acquisition and increased capital expenditures.

Outlook, Management Guidance, and Execution Risk

Management has increased confidence in DKL's trajectory, raising full-year EBITDA guidance to the upper end of the $500-520 million range. This upward revision reflects strong year-to-date progress and successful execution of the Libby 2 gas plant commissioning, which was completed in Q3 2025 and is expected to reach full capacity by year-end. President Avigal Soreq stated that DKL is "well positioned to manage through an economic downturn because of built-in recessionary protections which include minimum volume commitments on throughput and dedicated acreage agreements."

The Libby 2 expansion represents a critical execution milestone. The plant adds 100-120 million cubic feet per day of processing capacity and includes progress on acid gas injection and sour gas handling capabilities. Management expects the plant to be filled to capacity in the second half of 2025, and has "very high confidence" that the integrated crude, gas, and water solution will require processing capacity expansion earlier than previously expected. This forward visibility provides a foundation for sustained EBITDA growth into 2026.

The DPG dropdown in May 2025, which transferred Permian Gathering purchasing and blending activities from Delek Holdings to DKL, further increased third-party revenue while canceling $58.8 million in receivables. This transaction, combined with the amended Omnibus Agreement that increased administrative fees and established transition service obligations, demonstrates the systematic approach to economic separation. As Soreq noted, these moves increased third-party contribution to cash flow from 70% to around 80% on a pro forma basis.

DCF coverage ratio stood at 1.24x in Q3 2025, and management expects this metric to strengthen through the remainder of the year as recent growth projects contribute more meaningfully. The quarterly distribution increased 1.8% year-over-year to $1.12 per unit, marking the 51st consecutive increase. This distribution growth is consistent with management's intent to "maintain an attractive distribution growth profile over the long term," though the 143.83% payout ratio suggests distributions are consuming substantially all available cash flows.

Risks and Asymmetries: What Could Break the Thesis

The investment thesis hinges on DKL's successful transformation into an independent midstream platform, but several material risks could undermine this narrative. The most significant is sustained parent dependency. Despite progress toward 80% third-party cash flow, DKL's historical asset base and contract structure remain heavily tied to Delek Holdings' refining operations. If Delek's refineries experience prolonged downtime, financial distress, or strategic shifts away from contracted logistics, DKL could face volume declines that offset third-party growth. This concentration risk is more severe than at peers like MPLX, where Marathon Petroleum (MPC)'s larger scale and more diversified refining base provide greater stability.

Acquisition integration presents execution risk. DKL deployed over $530 million in 2024-2025 on H2O Midstream and Gravity Water, plus the W2W dropdown. While these assets are performing well initially, achieving promised synergies requires flawless operational integration and successful cross-selling to existing customers. The water disposal business faces regulatory scrutiny and permitting challenges that could limit expansion, while competition in the Midland Basin water market could compress margins if capacity additions outpace production growth.

Commodity price volatility remains a threat despite fee-based structures. While DKL does not take ownership of most products, sustained low crude prices or natural gas prices could cause producers to curtail drilling and production, reducing throughput volumes below minimum commitment levels. Management's recessionary protections provide downside mitigation but not immunity. The near-term economic outlook faces uncertainty from widespread U.S. tariffs, geopolitical instability, and commodity market volatility, which could curb exploration and production expansion opportunities.

The Wholesale Marketing segment's exposure to refined product price volatility creates earnings instability. Although this segment is being strategically de-emphasized, it still contributed $14.2 million in Q3 EBITDA. Sharp crack spread compression or RINs price volatility could cause material quarterly fluctuations that distract from the core midstream narrative.

Finally, valuation risk exists if the market continues to apply a "captive provider" discount despite operational improvements. DKL trades at 16.06x EV/EBITDA, a discount to larger midstream peers like Enterprise Products (11.07x) and MPLX (13.67x) when considering growth-adjusted multiples. However, if the company fails to achieve its $500-520 million EBITDA guidance or distribution coverage remains pressured, the stock could re-rate lower regardless of strategic progress.

Competitive Context: DKL's Niche in a Scale-Driven Industry

DKL operates in a scale-driven industry dominated by giants like Enterprise Products Partners (EPD), MPLX LP (MPLX), Plains All American (PAA), and Targa Resources (TRGP). These competitors dwarf DKL in size—EPD's enterprise value of $104.4 billion is 22x DKL's $4.7 billion, and MPLX's $81.3 billion EV is 17x larger. This scale disadvantage manifests in higher per-unit operating costs and less bargaining power with third-party customers, particularly for pipeline throughput where volume drives margin leverage.

However, DKL's niche focus creates competitive advantages that scale cannot easily replicate. The company's affiliation with Delek Holdings provides dedicated, high-utilization assets tailored to specific refinery operations, ensuring baseload volumes that competitors must fight for in the open market. This captive relationship, while historically viewed as a limitation, actually provides recession-resistant cash flows that are the envy of pure third-party players. When DKL's assets operate at 90%+ utilization serving Delek's refineries, competitors like PAA face spot market volatility and recontracting risk.

DKL's joint venture strategy offers another differentiator. Rather than building greenfield projects that require $1-5 billion in capital and 2-5 year permitting timelines, DKL partners in existing systems like Wink to Webster, gaining exposure to third-party volumes with shared risk and capital efficiency. This approach allows DKL to participate in Permian growth without the balance sheet strain that limits smaller competitors, while avoiding the complexity that slows larger players' decision-making.

The integrated three-stream offering—crude, gas, and water—provides a unique value proposition in the Delaware Basin. While TRGP focuses primarily on natural gas and NGLs, and PAA concentrates on crude logistics, DKL can offer producers a single solution that reduces coordination costs and improves operational efficiency. This is particularly valuable given the permitting difficulties for SWD wells that DKL's water assets have already secured. As EVP Reuven Spiegel noted, "most of the plant in the area just doesn't have and probably will not have" DKL's sour gas capabilities, creating a durable technical moat.

Financially, DKL's 27% year-over-year EBITDA growth in Q3 significantly outpaced larger peers' 3-7% growth rates, demonstrating that focused execution can deliver superior returns even at smaller scale. While absolute cash flow generation ($136 million quarterly EBITDA vs. EPD's $1.8 billion) remains modest, the growth trajectory and distribution coverage (1.24x) compare favorably. The key competitive question is whether DKL can maintain this growth momentum as it becomes more independent, or if the loss of parent-provided operational support will expose cost disadvantages.

Valuation Context: Discounted Transformation Story

At $45.82 per share, DKL trades at an enterprise value of $4.74 billion, representing 16.06x trailing EBITDA and 4.90x revenue. The stock offers a 9.78% dividend yield with a quarterly distribution of $1.12 per unit, though the 143.83% payout ratio indicates distributions exceed current earnings, funded by cash flow and debt.

Compared to midstream peers, DKL's valuation reflects a transformation discount. Enterprise Products Partners trades at 11.07x EBITDA with a 6.69% yield, MPLX at 13.67x EBITDA with a 7.71% yield, and Plains All American at just 7.62x EBITDA with an 8.57% yield. DKL's higher multiple suggests the market is pricing in significant growth, yet management's own commentary indicates the stock trades at a discount versus peers, with "very limited, if any, of this value reflected in DK shares."

The valuation asymmetry lies in the gap between operational progress and market perception. DKL has successfully increased third-party cash flow contribution to 80%, diversified into water and gas processing, and maintained 51 consecutive distribution increases. However, the market appears to be waiting for proof that the company can sustain growth without parent support and that the $530 million invested in acquisitions will deliver promised returns.

Key metrics to monitor include DCF coverage ratio, which at 1.24x provides thin but adequate cushion for the distribution. The company's $1 billion liquidity position following the $700 million debt issuance in June 2025 provides financial flexibility for additional acquisitions or organic growth. Debt-to-equity of 131.41% is elevated but manageable within the MLP structure, particularly given the fee-based cash flow stability.

The stock's beta of 0.45 suggests lower volatility than the broader market, typical for midstream assets, though this may rise as third-party exposure increases. Return on assets of 4.81% lags more efficient peers like MPLX (7.07%) and TRGP (8.45%), reflecting DKL's smaller scale and higher cost structure. The critical valuation question is whether DKL can close this efficiency gap through volume growth and operational leverage as new assets fill to capacity.

Conclusion: Execution Will Define the Narrative

Delek Logistics Partners stands at an inflection point where strategic independence and operational execution will determine whether it commands a premium midstream valuation or remains discounted as a refinery affiliate. The company has successfully deployed over $530 million in capital to build a unique full-suite offering in the Permian Basin, with the Libby 2 gas plant and integrated water assets creating technical moats that competitors cannot quickly replicate. Financial performance validates the strategy, with Gathering & Processing EBITDA growing 64% while legacy marketing businesses are deliberately restructured for separation.

The investment thesis hinges on two critical variables: the pace of volume ramp at newly acquired and constructed assets, and the sustainability of distribution growth as cash flow shifts from parent-guaranteed to third-party contracts. Management's confidence in filling Libby 2 to capacity by year-end and expanding processing capacity earlier than expected provides a near-term catalyst, while the 80% third-party cash flow target offers a tangible milestone for independence.

Risks around parent dependency, acquisition integration, and commodity volatility are real but manageable given minimum volume commitments and the essential nature of midstream services. The larger question is whether DKL can achieve operational efficiency comparable to scaled peers while maintaining its growth trajectory. If the company delivers on its $500-520 million EBITDA guidance and demonstrates that the 9.78% yield is sustainable through organic growth, the valuation discount should close, providing meaningful upside for unitholders willing to underwrite the transformation story.