Delek US Holdings, Inc. (NYSE:DK) Q1 2024 Earnings Call Transcript May 7, 2024

Delek US Holdings, Inc. beats earnings expectations. Reported EPS is $-0.5092, expectations were $-0.56. Delek US Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek US First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Rosy Zuklic, Vice President, Investor Relations. Please go ahead.

Rosy Zuklic: Good morning. And welcome to the Delek US first quarter earnings conference call. Participants on today's call will include Avigal Soreq, President and CEO; Joseph Israel, EVP Operations; Reuven Spiegel, EVP and Chief Financial Officer; Mark Hobbs, EVP Corporate Development. Today's presentation material can be found on the Investor Relations section of the Delek US website. Slide 2 contains our safe harbor statement regarding forward-looking statements. We'll be making forward-looking statements during today's call. These statements involve risks and uncertainties that may cause actual results to differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal for opening remarks.

Avigal Soreq: Thank you, Rosy. Good morning and thank you for joining us today. During the first quarter, our adjusted EBITDA was $159 million, an improvement over Q4. In Refining, our operation ran well. I would like to congratulate Krotz Springs and El Dorado refineries for receiving the Elite Silver Safety Award from AFPM. Congratulations. Our Logistics segment delivered another strong quarter. DKL continued to have a strong contribution from Midland Gathering System. Operations in the Delaware Basin have started to consistently exceed expectations. DKL's continued solid performance in the Midland and Delaware Basin validate its strong position in the Permian Basin. The Retail segment operated as expected in line with the typical first quarter seasonality.

Turning to our strategic priorities. As I've outlined in our previous calls, focus areas are: first, safe and reliable operation; second, being shareholder friendly while having a strong balance sheet; and third, unlocking some of the power value inherent in our system. I will now discuss each of these key priorities in detail. Safe and reliable operation is the core of everything we are trying to achieve. We continue to make good progress this quarter in our safety performance. Big Spring is on track to achieve the throughput rates and operating cost levels we have shared with you in the past. Joseph will provide more details on our progress. We remain committed to shareholder return and maintaining a strong balance sheet. During the quarter, we paid $60 million in dividends.

In May, the Board approved another $0.05 per share increase to the regular dividend. Our quarterly dividend now is $0.25 per share. In addition, we made progress this quarter on the DKL balance sheet. We'll continue to look for ways to make our balance sheet stronger. Next, I would like to talk about our sum of the part efforts. It has three components. First, highlighting the value of our midstream assets; second, highlighting the value of our Retail segment and third, creating value through internal improvements. Now, let me give you some color. Regarding midstream, during the quarter, DKL made a significant progress improving its financial position. Liquidity was increased from approximately $300 million to $800 million. The leverage ratio was reduced from 4.34x to 4.01x and additional units were added into the marketplace increasing public float.

I would like to give a bit more context around the value DKL's operation. DKL now is around $400 million plus annual run rate EBITDA. DKL started back in 2012 as a classic dropdown story and has evolved into something bigger. Today, DKL’s EBITDA is around 50% third-party business largely focused in the Midland and the Delaware basins. The Midland Gathering System is a premier asset in the heart of the Midland basin. DKL build this system organically. It now gathered up to 230,000 barrels per day and has around 350,000 of dedicated acreage contracted until 2030. It has an attractive asset that remains the growth engine of the Midland midstream operations. Moving to the Delaware Gathering business, we are proud of the development the DKL team has done since acquiring the system.

The system provides complete food, gas and water gathering to customers. We have significant growth opportunities in the system. Lastly, we have interest in pre-joint venture and fully owned pipelines. The pipelines mainly focus on long haul crude and long-term contacts. All these assets, the Midland and the Delaware Gathering Systems as well as the pipelines, could be a key part of a bigger system. Our sum of the part effort for the midstream business are tied to ensuring the right ownership structure to maximize value for DK and DKL holders, evaluating tax implications of those options and maintaining the right level of growth, liquidity and leverage at DKL. Our intention to continue highlight the value of our midstream operation is unwavering and we intend to take more constructive steps in the near future.

Moving on to highlighting the value of our retail assets. We initiated a process during the quarter to unlock the value inherent in the retail business. We engage investment bankers to review strategic opportunities and making good progress. We will provide more details in the near-future. Lastly, I would like to conclude the discussion on the sum of the part by highlighting cost efficiency and process improvement effort. There are two parts to it, first, optimization. We have shared in the past that we reduced our inventory carrying level to free up working capital. We continue to look for ways for further reduced working capital. Today, I want to highlight that our commercial and refining groups are working together on several initiatives.

We see opportunities in optimizing crude and product slates and being more efficient with our product placement. These efforts will require little to no capital and we expect to see enhance in the overall company EBITDA. Second, managing cost to our system. We have talked about our cost efficiency effort before. As we exit 2024, we expect to be between $90 million to $100 million run rate in cost savings and we see potential for additional savings in 2025. Overall, the steps we are taking position us well for strong 2024. We have plans in place to deliver a long-term value. We will be focused and disciplined towards achieving these goals. In closing, I would like to thank our entire team of over 3,500 employees. Their hard work and dedication are driving our success.

I would like to thank our investors and Board of Directors for their continued support. Now I will turn the call over to Joseph who will provide additional color on our operations.

Joseph Israel: Thank you, Avigal. Moving to Slide 6. In the first quarter, our teams operated well and within operations guidance despite freeze related interruptions. We successfully navigated through that and proactively positioned our system for the driving season. In Tyler, total throughput in the first quarter was approximately 72,000 barrels per day. Production margin in the quarter was $15.72 per barrel and operating expenses were $5.28 per barrel. In the second quarter the estimated total throughput in Tyler is in the 72,000 to 76,000 barrels per day range. In El Dorado, total throughput in the quarter was approximately 84,000 barrels per day. Our production margin was $9.29 per barrel and operating expenses were $4.72 per barrel.

Estimated throughput for the second quarter is in the 80,000 to 83,000 barrels per day range. During the month of March and April over 8% of our crude slate in El Dorado was correlated and we are expecting this optionality to serve us well in the future. In Big Spring, total throughput for the quarter was approximately 65,000 barrels per day. Our production margin was $12.87 per barrel, including an estimated unfavorable $3.50 per barrel impact from fluids related events back in January. Operating expenses in Big Spring were $8.08 per barrel, including approximately $1.50 per barrel related to winterization and freeze-related maintenance. We continue to see good progress with our self-help initiatives in Big Spring around people, process and equipment.

We remain focused on achieving level throughput, capture and cost targets as communicated in the past. Estimated throughput for the second quarter is in the 68,000 to 71,000 barrels per day range. In Krotz Springs, total throughput was approximately 76,000 barrels per day, driven by plant trace cleaning and work in the crude unit. Our production margin was $12.85 per barrel, including an estimated unfavorable $1.50 per barrel impact from the planned maintenance. Operating expenses in the quarter were $5.94 per barrel, including $0.35 per barrel related to the trays work. Planned throughput for the second quarter is in the 79,000 to 82,000 barrels per day range. With regards to our entire refining system, implied throughput target is in the 299,000 to 312,000 barrels per day range.

And to remind everyone, less operations noise does not only mean higher throughput barrels, it means a higher focus on business optimization as Avigal mentioned before. Crude oil selection in El Dorado and Tyler, higher placement of premium products in premium markets, like leveraging our long octane position in Big Spring in the Arizona market or maximizing high octane aviation fuel supply from our Tyler refinery. Moving on to the commercial front. In the first quarter, we reported a $65 million loss for supply and marketing. Of that, approximately $60 million loss was generated by wholesale marketing and a $1 million loss was contributed by asphalt, leaving approximately a negative $4 million contribution for inventory and risk mitigation.

Wholesale marketing faced perfect storm in the first quarter. First, it was challenged by extreme weather conditions, mainly in the midcom [ph] market as well as East and West Texas. The weather kept demand and margins low, especially through the freeze in January. Second, flat price increased approximately $14 per barrel in the quarter. And in a rising price environment, margins at the rack level are negatively impacted due to the lagging price nature of the business. And third, while lowering price environment, supports refining economics, it has been a profitability headwind for blenders, including our wholesale marketing. Asphalt contribution was also negatively impacted by weather conditions and the rising flat price environment. In the month of April, demand and rack differentials have improved for light products and asphalt consistent with seasonal trends.

In summary, we continue to make good progress with the fundamentals of our business. Our safety and environmental performance continue to trend in the right direction, reflecting good progress with operations excellence and mechanical integrity for the entire system. The business is well positioned for the driving season as reflected in our throughput guidance and we are expecting capture and cost performance to follow. I will now turn the call over to Rosy for the financial variance.

Rosy Zuklic: Thanks, Joseph. Starting on Slide 7, for the first quarter, Delek US had a net loss of $33 million or $0.51 per share. Adjusted net loss was $26 million, or $0.41 per share and adjusted EBITDA was $159 million. Cash flow from operations was $167 million. On Slide 8, the waterfall of adjusted EBITDA from the fourth quarter of 2023 to the first quarter of 2024 shows that the primary driver for higher results was from refining. The $117 million improvement in refining is primarily attributable to higher cracks and higher capture rates in the first quarter relative to the fourth quarter, partially offset by lower earnings from our wholesale marketing business. Logistics delivered $100 million this quarter and the higher expenses in corporate are primarily due to timing of employee-related costs.

Moving to Slide 9 to discuss cash flow. We drew $69 million in cash during the quarter ending the quarter with a balance of $753 million. Cash flow from operations was $167 million. Included in this is a positive $28 million of working capital, largely due to improvements in payables, more than offsetting builds in receivables and inventories. Investing activities of $42 million is largely for capital expenditures. Financing activities of $194 million reflects timing of accruals. This also includes $16 million in dividend payments and $10 million in distribution payments. On Slide 10, we have the breakout of the first quarter of 2024 capital program and full year 2024 forecast. First quarter capital expenditures were $46 million. Half of the spend was in refining, primarily addressing sustaining and regulatory projects.

For 2024, we are still estimating capital expenditures to be approximately $330 million. With the Krotz refinery major turnaround taking place in the fourth quarter, we expect higher capital spend in the second half of the year. Net debt is broken out between Delek and Delek Logistics on Slide 11. During the quarter, we drew $69 million of cash and paid down $103 million of debt, ending the year with a net debt position of $152 million. Slide 12 covers outlook items. In addition to the guidance Joseph provided, for the second quarter of 2024, we expect operating expenses to be between $215 million and $225 million. G&A to be between $60 million and $65 million. D&A to be between $90 million and $95 million and net interest expense to be between $80 million and $90 million.

We will now open the line for questions.

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