Delek Logistics Partners, LP (NYSE:DKL) Q4 2024 Earnings Call Transcript

Delek Logistics Partners, LP (NYSE:DKL) Q4 2024 Earnings Call Transcript February 25, 2025

Delek Logistics Partners, LP misses on earnings expectations. Reported EPS is $0.68 EPS, expectations were $0.74.

Operator: Today’s presentation material can be found on the Investor Relations section of the Delek US website. Slide two contains our Safe Harbor statement regarding forward-looking comments. Any forward-looking information shared during today’s call will 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 within our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal Soreq for opening remarks. Avigal Soreq?

Avigal Soreq: Thank you. Good morning, and thank you for joining us today. Despite the challenging refining margin environment, which we believe was around $6 below mid-cycle in Q4 of 2024, 2024 was a transformational year. We have vastly improved our operational performance, made significant progress on our sum of the parts efforts, and implemented key plans to increase the overall profitability of our company. I would like to highlight the progress we have made on our key priorities. First, surface-level operations. We have made great progress in improving the operations towards our company. We have successfully completed a major turnaround at KSR in the fourth quarter. Coming out of the turnaround, the refinery is showing improved operational performance.

The asset is running well, and we look forward to a strong contribution from KSR in 2025. Moving to Big Spring, in 2024, we have significantly improved reliability. We have consistently been running over 70,000 barrels per day. Looking forward, in 2025, we have no major turnarounds planned in our system, and we expect to continue our improvement. Now I would like to discuss our sum of the parts strategy. In 2024, we made great progress in unlocking the sum of the parts value inherent in our assets. In September, we sold our retail asset for $1.49 billion, and we are extremely happy with the timing and the value we received. The timing of the sale has allowed us to continue to progress our initiative in a tough refining environment. We have also made great progress in making Delek Logistics a strong independent midstream company levered to the growth in the Permian Basin.

In 2024, we successfully executed an economic swap of assets between DK and DKL. The swap will improve the profitability of our refineries going forward. At the same time, the swap brings more certainty to DKL cash flow through the contract extension by up to seven years. Our economic separation from DKL is increasing, and at the same time, the distribution DK receives from DKL continues to grow. DKL also announced two accretive acquisitions to add around $100 million in third-party EBITDA. After DK’s acquisition of Gravity Midstream, DKL’s ownership in DKL has come down to 63.6%. DKL is progressing its capacity expansion in the LiviGas processing complex and expects to complete the expansion in the first half of 2025 as previously communicated.

Additionally, we announced an FID on acid gas injection at the Libya complex in December. These steps highlight DKL’s progress in becoming an attractive high-growth, midsize midstream company benefiting from the natural gas growth in the Permian Basin. This is reflected in the strong guidance that Delek Logistics has provided today. Despite this great move, DKL continues to trade at a discount versus its peers, and very limited, if any, of this value is reflected in DK shares. We are in the process of taking additional steps such that the value of greater than $350 million in third-party EBITDA in DKL is fully reflected in DKL’s share price and DKL’s unit price. We are confident that we will complete the DKL deconsolidation in a methodical manner and create value for both shareholders and unit holders.

In 2024, we have made progress in improving the overall profitability of the company. We completed our zero-based budget initiative, which allowed us to save around $100 million in costs to our system. We completed this program in the second quarter of 2024, ahead of our original target of completion by the end of 2024. Our WVU effort laid the foundation for our enterprise optimization plan, or EOP. EOP aims to improve DK cash flow by $80 to $120 million per year starting in the second half of 2025. I am pleased to announce that we have made great progress with EOP, and now we expect to be closer to the top end of our cash flow improvement guidance. Despite our initial success, we are not standing still and look forward to further improving our cash generation power as we progress.

The final piece of our strategy is being a shareholder-friendly company with a strong balance sheet. During the quarter, we paid $16 million in dividends and bought back $22 million of our shares. We remain committed to a disciplined and balanced approach to capital allocation. Now I would like to make a comment about the small refinery exemption. As you know, the decision of the circuit court overturned the EPA denial of our small refinery exemption petition under the RFS in July of 2024. Our petitions were sent back to the EPA for reconsideration. We are optimistic that the EPA will revise its approach following the court ruling and grant us relief. We hope the recent ruling on SREs, along with the Supreme Court ruling on the Chevron Deference case, will reduce unneeded bureaucracy and allow for a predictable approach to the SRE petition review.

In closing, I would like to thank our entire team for their hard work and dedication. We are excited about the prospects for DK in 2025 and beyond. Now I will turn the call over to Joseph, who will provide additional color on our operations.

Joseph: Thank you, Avigal. First, I would like to congratulate our team on another safe, reliable, and environmentally compliant year. Our focus on hiring the right people, developing good processes, and proactively managing our equipment is well reflected in the field. It is giving us a strong foundation to perform, optimize, and grow our business. In Tyler, total throughput in the fourth quarter was approximately 66,000 barrels per day. Production margin in the quarter was $6.66 per barrel, and operating expenses were $5.51 per barrel. During the first quarter, we are executing our planned maintenance in the Alky unit, including an upgrade scope, which will allow us to increase production of high-value products by approximately 500 barrels per day.

For the first quarter, our estimated total throughput in Tyler is in the 65,000 to 69,000 barrels per day range. In El Dorado, total throughput in the fourth quarter was approximately 77,000 barrels per day. Our production margin was $0.56 per barrel, and operating expenses were $4.78 per barrel. Estimated throughput for the first quarter is in the 73,000 to 76,000 barrels per day range. On the strategic front, we are making good progress with our EOP initiatives, which are expected to add by midyear $50 million of annual EBITDA run rate in the El Dorado integrated system. The incremental approximately $2 per barrel of net margin will support El Dorado cash flow generation through the cycles. In Big Spring, total throughput for the quarter was approximately 73,000 barrels per day.

Our production margin was $5.04 per barrel, and operating expenses were $6.29 per barrel, including approximately $0.50 per barrel of winterization and maintenance special activities. Focus on Big Spring is reflected in the numbers. Total throughput in 2024 increased over 10% compared to 2023 due to improved reliability. The cost structure is approaching our target, and as important, it is mostly driven now by routine and proactive agenda rather than reactive. In the first quarter, we are replacing the catalyst in our reformer and diesel hydrotreater per plan. As a result, estimated throughput for the first quarter is in the 57,000 to 61,000 barrels per day range. In Cross Springs, the team successfully completed the planned major turnaround.

Since startup, we have demonstrated improved crude capacity, product mix, and liquid yield recovery capabilities consistent with our plans. Total throughput in the fourth quarter was approximately 50,000 barrels per day. Our production margin was $2.71 per barrel, and operating expenses in the quarter were $5.27 per barrel. Our planned throughput for the first quarter is in the 83,000 to 86,000 barrels per day range. Our implied system throughput target for the first quarter is in the 278,000 to 292,000 barrels per day range. Moving on to the commercial front, in the fourth quarter, supply and marketing contributed a loss of $34.6 million. Of that, approximately $12 million loss was generated by wholesale marketing driven by seasonal low demand trends around the whole system racks.

A $22 million loss was attributed to supply, and a negative $0.5 million contribution was generated by Asmode. In summary, we continue to execute well on the fundamentals of our business. After successfully addressing reliability gaps, our teams continue to focus on operational excellence and commercial optimization initiatives as we position ourselves for the coming gasoline season and future cycles. I will now turn the call over to Robert Wright for the financial variance.

Robert Wright: Thank you, Joseph. I will start by referring to slide fourteen. For the fourth quarter, Delek had a net loss of $414 million, negative $6.55 per share. Included within this is a partial impairment of our goodwill balance of $212 million. Adjusted net loss was $161 million or negative $2.54 per share, and adjusted EBITDA was a loss of $23 million. On slide fifteen, the waterfall of adjusted EBITDA from the third quarter to the fourth quarter of 2024 shows that the decline is primarily because of lower refining contribution. The $80 million decrease in refining is primarily attributable to a lower margin environment in the fourth quarter relative to the third quarter. As for the logistics segment, it continued to have another strong quarter, delivering $107 million in adjusted EBITDA.

Moving to slide sixteen to discuss cash flow. Cash flow from operations was a use of $164 million. Within this amount is our net loss for the period, in addition to an outflow of approximately $71 million of timing-related working capital movement, which includes the impacts of the inventory intermediation agreement. Investing activities of $216 million include capital asset purchases of $191 million and a $23 million deposit paid for the Gravity acquisition, which closed on January 2, 2025. Financing activities of $77 million reflect the DKL equity offering and timing of accruals. This also includes $22 million in share repurchases, $16 million in dividend payments, and $19 million in distribution payments. On slide seventeen, we have the actual results of the 2024 capital program.

Fourth quarter capital expenditures were $198 million, $140 million of this spend was in the refining segment, a large portion of which was related to the successful completion of the KSR turnaround. The remaining amount is largely spent associated with the construction of the Liviu gas plant, which remains on track from a timing and cost perspective. As we have previously announced, our standalone DK Capital outlook for 2025 is approximately $150 million to $170 million. Our net cash position is broken out between Delek and Delek Logistics on slide eighteen. During the quarter, we drew approximately $300 million of cash primarily due to anticipated capital expenditures on growth projects and the turnaround at KSR. Additional unfavorable impacts included working capital timing differences and the overall market conditions impacting our recognized EBITDA results for the period.

Excluding Delek Logistics, we finished the year with an increase of $82 million in net debt. We are pleased with the relatively modest increase in net debt for the year, especially considering the broader market conditions and the impact on our peers, many of whom have experienced substantial increases. Moving now to slide nineteen where we cover outlook items. In addition to the guidance Joseph provided, for the first quarter of 2025, we expect operating expenses to be between $220 million and $235 million. G&A to be between $55 million and $60 million, and net interest expense to be between $78 million and $88 million. We will now open the call for questions.

Q&A Session

Operator: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press *1 on your telephone keypad. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking a question. We do request for today’s session that you please limit yourself to one question and one follow-up. Your first question comes from the line of Manav Gupta of UBS. Your line is open.

Manav Gupta: Morning, guys. I wanted to focus a little bit on Slide ten. Obviously, you are making a lot of improvements on El Dorado. Help us understand what more can be done to make this a truly competitive asset, something which can be performing in line with probably Tyler here at least.

Avigal Soreq: Yeah. Manav, good morning. Thank you for your question. El Dorado is a big focus for us. Joseph’s leading that with a lot of talent, and I will allow Joseph to chime in.

Joseph: Yeah. The El Dorado is the most significant beneficiary of our EOP focus on the product mix. We started to make and sell jet fuel through the rack. We are looking to convert heavy bottoms to light products. Process efficiency, we are focused on liquid yield recovery mainly in the reformer FCC and Ascal Terriers. On the logistics front, we put together a new logistics team, and we are already shipping more products away from the local market to optimize the netbacks. Bottom line, Manav, considering our strong refinery team out there, the asset flexibility, and the $50 million low-hanging fruits, we are confident about our ability to translate this progress to numbers sooner than later.

Manav Gupta: Perfect, guys. Quick follow-up here is it looks like you’re growing DKL EBITDA, although you’re, you know, you’re divesting it down slowly. Is the strategy here to look for smaller proton deals, whether it’s water, crude, gas, and basically continue to grow the company at the DKR level and at the same time, try and bring down the ownership below 50%?

Avigal Soreq: Yeah. So, Manav, I will take the question. And I would like to give you a bigger answer than that about some of the parts that’s what we are doing. And some of the parts, together with EOP, are the most strategic initiatives we have for DK. Right? And deconsolidation, I want to make it crystal clear, is happening and will happen as we speak. So it’s very, very clear. And I want to take a moment to reflect on 2024 actions that we did around it. Right? So in 2024, we sold retail. As we wanted. We continue to make progress in the deconsolidation. Right? We took the ownership of us from 79 to 63 to below 64% today. We grew the EBITDA while we are doing all of that from $385 million not very long ago to over $400 million this year, the 2024 to $500 million guidance for 2025, which is another step.

And we increased the third-party EBITDA from 40% to 70%. Manav, while we were doing all of that, we also increased the distribution that DK gets from DKL. So it’s many, many, many boxes that we are checking the box on. And today, I don’t know if you noticed, we announced another efficient tool in our toolbox, to allow basically an efficient tax way for DK to sell back their units to DKL. We announced it today for $150 million to up to $150 million. So the other and that’s a benefit for DK for the efficient way. And it’s also a benefit for DKL because of free cash flow. Right? You are boarding at seven, you are boarding at seven, and you are avoiding the cost of ten or eleven. That’s very beneficial for both companies. And the last point I want to make is that the deconsolidation is the goal of both companies.

Because it will allow DKL to grow over time, and then allow DK to fulfill to get the whole value in the asset. With that said, Mark was very busy this year with all the deals we had, and the plan was that he was gonna be very busy in 2025 as well.

Mark: So I’ll let Mark chime in. Yeah. Thanks, Avigal. And look, we’re very happy with our some of the parts effort in 2024. And we’re very active in the year in advancing our deconsolidation efforts. You know, both H2O and Gravity checked all the boxes and what we look at for acquisitions. You know, highly strategic and highly synergistic with our Midland Basin operations and what we’re trying to do out there as a full-service midstream provider. Immediately accretive to free cash flow, improved our leverage, and increased our coverage ratio. We also initiated organic growth projects in the Delaware to add to our gas process capacity and also add critical sour gas capabilities. And finally, drop down Wink to Webster. Our 15% interest in Wink to Webster.

And when you take all of those combined, we’re adding significant third-party EBITDA to DKL, which is driving this economic separation between DKL and DKL that we’re talking about. If you layer on top of that, we also continue to see premium valuations paid in the private markets by midstream companies for midstream assets over the past few months. And in particular, those tied to the Permian Basin, which is, you know, is the core of our DKL operations. And as Avigal said, our focus is that we’re gonna continue our measured approach to deconsolidation, and the focus is gonna continue on enhancing and maximizing value for both DK shareholders and DK.

Manav Gupta: Thank you, guys.

Operator: Your next question comes from the line of Matthew Blair of TPH. Your line is open.

Matthew Blair: Thank you, and good morning. Was hoping you could go into the supply and marketing dynamics a little bit more in the fourth quarter. I understand there’s some seasonality with wholesale, but could you help us understand why is that just an outright negative EBITDA contribution? And does there need to be any structural changes there? And then how are these supply and marketing dynamics trending so far in the first quarter?

Avigal Soreq: Hey, Matt, good morning. Thank you for the question. First of all, I’m very happy on the progress that DKTS are doing. If you are comparing that to the fourth quarter of last year, the market condition back then was better versus this quarter, but DKTS achieved a million-dollar better this quarter versus last quarter. So that’s a very good step in the right direction. I will let Pat Riley, our chief commercial officer, chime in on that answer and give you some color.

Pat Riley: Thank you, Avigal. Fourth quarter DKTS performance was impacted primarily by seasonal inland demand weakness led by the group, and a one-time major turnaround across. With that said, DKTS made significant progress on our 2024 initiatives. As Avigal just mentioned, supply and trading market conditions in Q4 were significantly weaker relative to the same time period in 2023. So as an example, group diesel weakened by 14 cents per gallon, it’s almost $6 a barrel year on year. Now despite these headwinds, DKTS has outperformed fourth quarter 2023 by nearly $10 million. DKTS will play a crucial role in the delivery of the 2025 EOP, and our strategy is actually simple. It’s intelligently streamlined operations thereby reducing costs, further increase our margins, on the back of optimization of supply and trading leading to our partnership with our assets to flex our broader product offering, and further mature DKTS’s newfound and expanded market reach.

We’re excited for the commitment and the challenge.

Matthew Blair: Sounds good. And then on the RD, have you made a decision on whether to invest in the Bakersfield renewable diesel plant?

Avigal Soreq: That’s not to now. Seven, ten seconds. If something changes, we’ll definitely let you know, but it’s not, and maybe, Mohit, do you wanna chime in on that?

Mohit: Yeah. Matt, that option is still available to us. As you and I have discussed in the past, the team over there has to show that they have had healthy operations for around three months. And then we have around ninety days to exercise our option. And we are obviously going to be looking at it once we are asked to look at that option. But as of right now, that option is still available to us, and we’re just hoping for the team to have those operations in order before we start making our decisions.

Matthew Blair: Sounds good. Thank you.

Operator: Next question comes from the line of John Royall of JPMorgan. Line is open.

John Royall: Hi. Good morning. Thanks for taking my question. So my first question is on the OpEx guide for 1Q. We noticed a step up from where you had guided to 4Q, but it’s also in the context of things going well with EOP. So I was hoping you could help us bridge the difference. Maybe how should we think about that OpEx number as we progress further into 2025 beyond that 1Q guide?

Avigal Soreq: Absolutely, John. Thank you for the question. Mohit was putting the guidance together, so I will let him chime in. Please, Mohit.

Mohit: Yeah. John, thanks for the question. So as far as our company’s concerned, OpEx and cost reduction, we are taking a lot of pride in it. And, you know, you’re seeing the results through EOP, have seen the results through ZBB. As far as your specific question around Q1 guidance is concerned, so there are four factors which are influencing the guidance. The first one is, as you know, that we closed Gravity Water Midstream presented guidance on a consolidated basis. So you’re seeing some OpEx coming from Gravity Water Midstream. Second, you know, we are running higher throughput quarter over quarter. So that’s also influencing our, you know, OpEx number. Third piece is natural gas. As you’ve seen, natural gas prices have gone a little bit higher.

That’s also influencing our OpEx numbers. And finally, we have some planned maintenance at Big Spring in 1Q, which is reflected in our throughput guidance. So that is also impacting our overall OpEx. But as I started my answer, OpEx and cost reduction is an extremely positive story for Delek. We’re very excited about how, you know, OpEx reductions are contributing to EOP and our free cash flow generation, and we look forward to updating you guys more on that.

John Royall: Great. Very helpful. Thanks, Mohit. And then follow-up is another one on guidance. Maybe just on the DKL EBITDA guidance. Just trying to bridge from the run rate of about I think it’s about $430 million annually in 4Q to this guide that’s about $50 million to $90 million above that. If you could just walk us through some of those moving pieces. I know, obviously, there’s gravity. There’s the gas plant coming on midyear. Maybe some other things on the organic side. Just a little bit of detail on how you get from the $430 to $480 to $520.

Avigal Soreq: Yeah. Absolutely. So first of all, John, we need to take a step back. And talk about DKL in a broader context. Right? DKL is a growing story, and obviously, as we speak, we are increasing the economic separation between the companies. We are doing that very methodically and to benefit both unit holders and shareholders, as you see by all the actions that we have done in the last eighteen months or so. That’s very, very important. We decided to allow you guys to have guidance for DKL because we want everyone to model that company. Right? To be able to understand the value creation that was done here. So we’re taking a lot of pride in what we are doing here. We think the guidance we gave you is solid and good. And, Mohit, do you wanna chime into that as well? If there are more modeling questions, we can take it offline, obviously.

Mohit: Yeah. I think, Avigal, you covered most of it. But, John, I can definitely help you walk through the moving pieces on a, you know, we can do a one-on-one call after this. So maybe we should take that offline.

John Royall: Great. Thank you.

Avigal Soreq: Thank you.

Operator: Your next question comes from the line of Doug Leggett of Wolfe Research. Your line is open.

Kim: This isn’t Kim. You offered Doug. He sent his going to see he’s traveling at the moment. My first question kind of piggybacks on some of the, you know, commentary that’s already been had. In addition to the EOP, you guys have quite a few options in terms of being able to release value from DKL. Were you in the process, for example, with the install gas permitting? And is there a kind of line of sight on potentially other saleable assets going forward?

Avigal Soreq: Yeah. So you started your question with the EOP. So I will start my answer with the EOP. And I will give you some more broader context around that. But so especially in the refinery environment that we are at, EOP is all about free cash flow. Period. End of story. That’s what we are after. Right? We obviously, today is a happy day around that because we felt comfortable enough to take our guidance towards the end of the range we gave in the past. So that’s a happy moment for us. We’ve seen significant progress on the cost side already been signed, and we will see them executed and coming to fruition over the next few months. And as Pat mentioned, we see good progress also on the margin improvement that we see on EOP.

But I want to ensure you that we are not stopping here. We’re not standing still. We always have more options. And more things that we are working on and adding to that very important initiative, and we are very optimistic about that. The last comment I want to make is that it’s reaching neutral to market conditions, and all the actions that we are doing here are new actions that were not done in the past. So we are very optimistic, and Proven is very close to that and managing that very nicely, and I will let him chime in on that.

Proven: Thank you, Avigal. So the EOP plan includes a bank of projects from all areas of the company, and I will address specifically your question about DKL at the end. Each project has to be validated two ways. One, that it’s sustainable, and two, that is, for the most part, market agnostic. Once vetted, it goes into execution and is added to the projection. You can see on the deck that we’re provided, it’s reflected in slide nine in the green boxes. Each project has a different time frame for each, and that is why we’re measuring third and fourth quarter run rate. As for DKL, we have the sour gas blends, which our team is executing on time, on budget, and it’s expected to flow in the second quarter. And that gives us a whole new dimension and flexibility around gas.

Kim: Thank you for that.

Operator: Your next question comes from the line of Jason Gabelman of TD Cohen. Your line is open.

Jason Gabelman: Hey. Hey. Morning. Thanks for taking my question.

Avigal Soreq: Hey, Jason. Good morning. Thanks for joining us today.

Jason Gabelman: I wanted to ask about the DKL repurchase program of DK units. I’m wondering, one, what the timeline is to deploy that buyback cash, and two, once DK gets that cash, what it’s gonna use that cash for.

Avigal Soreq: Yes. Thank you for the question. The time that we put the program in is all the way till 2026. Obviously, it’s a detailed option, but we are very close to that. So we do that when the time is right. You probably can appreciate that that’s another tool in our toolbox that benefits the deconsolidation for both companies and helps free cash flow for both companies. So that checks many, many boxes. And it’s very tax efficient. I think you can be part of a very creative way how to create deconsolidation with no tax impact, basically. But I want to take the other part and then talk about the capital allocation program we have. And I want to give a broader discussion around that. So we said many times, and we are saying that today, that we are maintaining dividends towards the cycle.

We are doing that. We’ve done that, and we will do it in the future. And then we have a balanced approach between taking care of the balance sheet and buyback. We did buyback in Q3, we did buyback in Q4, and we are doing buyback in Q1 of 2025. At the current valuation of our share price, we see a huge value in our share price. And we are acting on that just to make it very clear. So that’s kind of that’s where we are.

Jason Gabelman: Great. No. Yeah. Appreciate the color on the capital allocation. The other question is just back to Group three dynamics, and it sounds like in a weaker inland margin environment, you see some weakness in that supply line item. And I wonder, you know, kind of post-COVID, we’ve seen inland markets become more seasonal, whether weaker in the winter. So should we expect that that supply line is weaker in 4Q and 1Q kind of in line where it was this past quarter or maybe, I guess, a little better. Based on what’s going on in the EOP program. Or, I guess, how should we think about the seasonality of that supply line? Thanks.

Avigal Soreq: Yeah. So listen. There are two different questions here. Market observation, there is some truth that there is a weakness in the winter and peaks in the summer. But I’m not gonna provide we’re not gonna provide the guidance for DKPS. We didn’t do this in the past, and don’t think it’s best practice in the market. We are not gonna deviate from that today. But I’m gonna tell you, and Jason, you need to know that very well that we are moving very well with the things that we are controlling. Like different products that we are start moving, different markets that we are moving towards, and I can be only very pleased with the progress we are doing about what we can control. So and I will leave it to that.

Jason Gabelman: Okay. Understood. Thanks for the answers.

Operator: That concludes our Q&A session. I will now turn the conference back over to Avigal Soreq for closing remarks.

Avigal Soreq: Yeah. So I would like to thank my colleagues around the table for a great, safe, and reliable year. I want to thank the entire Delek employees for great execution and a great commitment to the company, and I’m very pleased with that. To thank our board of directors and to thank you investors for believing in our story and our journey. With that, I would conclude the call. We will see you next in the next quarter. Thank you.

Operator: This concludes today’s conference call. You may now disconnect.