04. Delek US Holdings, Inc. (NYSE:DK)
Price Reaction after the Downgrade: -0.40(-1.58%)
On June 10, TD Cowen delivered a significant shift in its evaluation of Delek US Holdings, Inc. (NYSE:DK), downgrading the company’s rating to a “Sell” classification, projecting a potential downside of 20%. This decision was informed by various factors impacting the company’s performance and future prospects within the oil refining industry.
Key concerns highlighted by TD Cowen encompass operational uncertainties and valuation apprehensions. Delek US Holdings, Inc. (NYSE:DK) has encountered challenges, including an EBITDA shortfall attributable to volatility within its Supply & Other segment, coupled with a lack of clarity regarding its buyback strategy. Additionally, the Big Spring refinery’s anticipated full operational status by the end of 2024 has not materialized, fostering market skepticism regarding the company’s strategic reorganization value. These operational hurdles are further compounded by constrained free cash flow generation under prevailing conditions, thereby constraining the company’s capacity to enhance its earnings.
In aggregate, these factors paint a picture suggesting that Delek US Holdings, Inc. (NYSE:DK) may encounter difficulties in achieving significant growth in the immediate future. Consequently, TD Cowen’s downgrade and recommendation to sell the stock underscore the challenges facing the company and the perceived limitations on its potential for near-term expansion.
The market response following TD Cowen’s downgrade was notable, with Delek US Holdings, Inc. (NYSE:DK) stock price experiencing a decline of 1.58% on June 10, ultimately closing at $24.88. This adjustment reflects investor apprehension regarding the company’s outlook and underscores the importance of comprehensive analysis and strategic decision-making within the dynamic oil refining sector.
Maran Capital made the following comment about Delek US Holdings, Inc. (NYSE:DK) in its Q1 2023 investor letter:
“Delek US Holdings, Inc. (NYSE:DK) is a holding company that owns four refineries, about 250 gas stations, and 34.3 million shares of publicly traded Delek Logistics Partners, LP (NYSE: DKL), its captive master limited partnership, which owns a series of oil pipelines and infrastructure assets.
Delek has 67 million shares outstanding and recently traded at $21.50 per share, putting its market cap at just over $1.4 billion. I estimate it has around $300 million in net debt (thought the balance sheet is opaque because DK consolidates DKL’s financials), so its enterprise value is $1.75 billion. What are investors getting for $1.75 billion? Well, for starters, DK’s position in DKL, which recently traded at $48/sh, is worth $1.65 billion. So, the adjusted enterprise value (or “stub value” in special situation parlance), taking into account net debt as well Delek’s DKL position, is approximately $100 million.
The gas stations are likely worth $300-$400 million, based on recent comparable transactions. And I think the refineries could be worth another $1.5 to 2 billion or more ($22- 30/sh), triangulating from a number of valuation approaches. All in, DK appears to be a fifty-cent dollar, with essentially all of its market cap covered by its ownership position in DKL, little debt at the parent company, and significant free cash flow…” (Please click here to read full text)
