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

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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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta: Good morning, Avigal team.

Avigal Soreq: Good morning, Neil. How are you?

Neil Mehta: Good morning, sir. A couple questions for you on the guide. The first is just the capital program to Rosy’s point, Q1 of $46 million versus the full year of $330 million. Are you tracking inside of that $330 million? Is capital efficiency positively surprising, recognizing you’ve got the crops turnaround? And the related question to that is you’ve got a big turnaround crops this year, later this year. How do you define success? Because I think that’ll be an important test for that asset.

Avigal Soreq: Yes. First of all, thank you for the question. So it’s still early in the year. We are not changing our guidance at this point. We are still with the $330 million we mentioned. And in terms of the success of the KSR [ph] turnaround, I will give the three elements. First of all, it’s safety. We need to make sure that it’s a safe turnaround and everyone come back home the same way they come back to, they went back to work. That’s number one. Second is the scope of the work. We need to make sure that we are doing the scope right and getting the uplift of the $30 million we said before. And the third, obviously is the cost. So those are the three components we demonstrate to ourselves doing the entire turnaround. We can achieve all of those traits and we aim to achieve those one in this turnaround as well.

Neil Mehta: Thanks, Avigal. And then you indicated you initiated a process to unlock the value of the retail business. Can you talk about how you came to the decision that this makes sense to potentially monetize and where we are with the process. Are there any dis-synergies in your early look at this process?

Avigal Soreq: Yes. Thanks, Neil. I will answer the question more wider about some of the past efforts that we are obviously trying to do. So as you probably mentioned in the call, we created third-party value over time and that’s obviously something that is very important for us to achieve. So we are committed to make sure that value is achieved at all times. And we demonstrate during that quarter that the financial strengths of the DKL balance sheet is there in order to support it. That’s point number two. The point number three, that we want to make sure that the value is being created both for the DK shareholder and the DKL unitholder, and both units show the full value. We obviously, as we mentioned, we shared that we started the formal process. The process goes as planned. And I don’t know, Mark, maybe you want to add.

Mark Hobbs: Yes, sure, sure, Avigal and I’ll touch on the some of the parts initiatives as well. I just trust a few things here. As Avigal mentioned earlier on the call, our belief is that in order for us to highlight the hidden value that we have in the attractive midstream position that we built, in particular in the Permian Basin, we need to find the right ownership structure for those assets. And I think, as we’ve discussed clearly on prior calls, we’ve evaluated all the options that are in front of us, the governance and tax implications of each of those. And we still want to stress that in any action that we take, ultimately on the midstream side, we are focused and laser focused on ensuring that we make both Delek and Delek Logistics stronger entities from a cash flow and leverage standpoint.

So we don’t want to move away from that position, and that’s what we’re focused on. On the retail front, as Avigal mentioned, we have mandated an investment bank to work with us on evaluating those strategic options that are in front of us for that business. And things are progressing well on that front. We don’t have anything specific that we want to say today, but we will come back to you, hopefully in the near future with some more color on that. But, Neil, to your point, the way that we’re envisioning this is that we don’t see any significant or particular dis-synergies associated with anything that we do on that front.

Neil Mehta: Thank you, Mark.

Operator: Your next question will come from the line of Roger Reed with Wells Fargo. Please go ahead.

Roger Reed: Yes. Thank you. Good morning.

Avigal Soreq: Good morning.

Roger Reed: I guess maybe a little bit. I’m going to kind of follow-up on Neil’s, I mean, what is the right way to think about use of funds from retail disposition or anything else? I mean, I’m thinking, even wider. You’ve got your ownership and Wink to Webster that’s held inside of DK relative to probably belongs more to midstream sort of operation. So maybe a little more of your thoughts as you rearrange some of the pieces here to achieve that upside value for both DK and DKL. Where should we think about that working out?

Avigal Soreq: Yes. Roger, first of all, thank you for joining us today. Yes, we start the answer. So let’s talk about capital allocation broader than just that. As we demonstrate in the last few quarters, we have a priority to have a consistent and growing dividend over time. We have demonstrated that few quarters now. The second priority is, we have outlined this quarter very specifically is having a strong balance sheet, right. You probably can appreciate the major improvement that we have seen – that we have demonstrated on the DKL balance sheet. And obviously the third point here is the buyback. I want to be clear. We see a lot of value in our share price today. But we elected not to do buybacks due to development in the strategic initiative progress.

So this is where we are on capital allocation. Obviously, you ask specifically about W to W. W to W always pay in our toolbox that the asset develop very nicely in the last few years. And probably we are going to – we see the value of that asset going up and it’s a very premiere midfield [ph] asset.

Roger Reed: Yes, no question about that. I guess, let me pivot a little bit just to the operational front. Big Spring been doing a lot of work there. Where are we in this process? Halfway through three quarters of the way through. It’ll take a long time to do the last 10% of improvements there. But from a reliability and an OpEx standpoint, just how that show – setting up.

Avigal Soreq: Yes, Roger. So we definitely see improvement, but Joseph is very close to that. So I will let him answer it.

Joseph Israel: Yes. We are executing our plans in Big Spring and as a result we see the improvement, reliability that we expected which allows us to meet our targets like we communicated in the past. One run around 70,000 barrels per day on a more consistent basis. It’s not the first quarter, but it’s starting to be real here with the guidance for the second quarter. Second is improve our capture toward 70% really on mid cycle basis. And last is to improve our cost structure. We promised the $1 per barrel per quarter reduction until we get to the mid $5 per barrel target range by the end of the year. So very happy and proud with the team and the progress that we are making.

Roger Reed: Thank you.

Operator: Your next question will come from the line of Manav Gupta with UBS. Please go ahead.

Manav Gupta: My question is more on the DKL side as it relates to DK. DKL continues to be bigger and bigger part of the earnings in the last five years. And as DK looks at DKL, do you see with the Permian growth you moving in a direction where the third-party EBITDA could just continue to grow and increase versus drop downs or organic DK contribution to DKL? I mean, just trying to understand from this point on, should we expect the DKL to continue to grow with more and more third-party EBITDA in there?

Avigal Soreq: Yes. First of all, Manav, thank you for joining us today. It’s a great question. We are very proud of the progress we did. Our first priority that both unitholders and shareholders, the value that we are creating when we find itself into those two papers. And that’s a priority for us. Obviously, we have demonstrated first to ourselves and then to the market that we can manage those assets and can show abnormal return on them. And if the opportunity presents itself, as long as it’s accretive for both DK and DKL will take a good hard look into that and keep developing organically and inorganically. So the answer is to the bottom line. If the opportunity presents itself, then it’s a good opportunity and can be benefit for both unit and share. So we’ll take a good hard look into that.

Manav Gupta: Second quick question here is, look quarter-over-quarter, three refinery showed pretty good improvement, Krotz, Big Spring and even El Dorado. And I’m just trying to understand, is the kit getting to a point where you would like it to be? Obviously, there are scope of improvement, but if we look between fourth quarter performance and the first quarter performance, what were some of the criterias which allowed these three assets to deliver much better earnings in 1Q versus just the last quarter?

Avigal Soreq: Yes, absolutely. So some of that is our doing – obviously the market that was better and that’s reflecting the capture rate. We obviously gave a clear guidance to the OpEx that shows better even in Q2 versus Q1. But Joseph, why don’t you chime in and give some more color into that?

Joseph Israel: Yes. So far it has been mainly playing defense, right. And in the first quarter, if you count the $3.5 per barrel LPO in Big Spring and the $1.5 per barrel headwind on the OpEx, this is $30 million that was left on the table related to the freeze events, right. But to answer your question, as we have lost less and less surprises and headwind to deal with, we are more and more focused on transitioning to offense and optimize our business, thinking more about process optimization, selecting the right code, making the right products, taking it to the right markets. At the end of the day, it will translate to a much better capture. And the market will get a chance to see the true profitability option of this system.

Manav Gupta: Thanks, guys. Congrats on a stronger quarter and keep up the good work. Thank you.

Joseph Israel: Thank you.

Avigal Soreq: Thank you, Manav. Thank you again.

Operator: Your next question comes from the line of Paul Cheng with Scotiabank. Please go ahead.

Paul Cheng: Hi. Good morning, guys.

Avigal Soreq: Good morning, Paul.

Joseph Israel: Good morning, Paul.

Paul Cheng: Joseph, just curious that, I mean, you get hit, as you mentioned earlier, that on the winter storm, Big Spring, you estimate that there’s close to $5 impact, both in the profit margin as well as on the cost? And then Krotz Springs is another say, call it 150 or maybe I got it wrong, but also that have maybe at least $1.50 on the impact. So what’s the lesson that we learned from that? Is that something that you can do to prevent it because the winter storm is actually well telegraphed way beforehand? Is there anything operationally that we can do in order to minimize that kind of impact? That’s the first question.

Joseph Israel: Yes. Thank you for the question. So first, I will correct one thing. The $1.5 per barrel in Krotz Springs was related to a planned trace cleaning in the crude unit. So we knew about it coming to the quarter. It has been a long cycle and to make it all the way to the turnaround and get you the maximum throughput through the driving season, we executed the scope in a low margin environment. And I’m very glad we did it. In Big Spring, it was really the typical challenges of freeze, right. I mean, frozen lines, instrumentation like our peers dealt with and what are we doing? What are the lessons? It’s all about risk mitigation. You think about people process equipment, and our main job here is to mitigate the risk each and every day and to better position the asset to deal with every possible challenge and whatever the market gives to us. So very proud of the team. Looking at the second quarter, we are ready to run and I think good things are coming our way.

Paul Cheng: Second question, on the supply and marketing, you said that wholesale lost $60 million in the quarter and asphalt just $1 million. I think in the past, you sort of giving a kind of guidance saying that the wholesale will be doing roughly about $30 million a quarter and asphalt will be lower in the first and the fourth quarter, maybe at $5 million, and then in the second and third quarter will be somewhere in the $15 million or for a full year about $40 million. So based on what we’ve seen in the last several quarters, is those guidance still a good one or that internally that you guys have viewed them somewhat differently?