Delek US Holdings, Inc. (NYSE:DK) Q3 2023 Earnings Call Transcript

Delek US Holdings, Inc. (NYSE:DK) Q3 2023 Earnings Call Transcript November 7, 2023

Delek US Holdings, Inc. beats earnings expectations. Reported EPS is $2.02, expectations were $1.36.

Operator: Good day, and welcome to the Delek US Third Quarter earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Rosy Zuklic, Vice President of Investor Relations. Please go ahead.

Rosy Zuklic: Good morning and welcome to the Delek US third 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 two contains our safe harbor statement, regarding forward-looking statements. We’ll be making forward-looking statements during today’s call. These statements risk 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 us — for joining us today. We delivered strong third quarter results. All segments performed well. Our team remains focused and drove improvements across our businesses. I thank each member of our Delek team for their contribution. From a macro perspective, during the quarter, we saw a significant volatility in the markets. Gasoline crack weakened, diesel crack CAC remained strong, driven by inventory levels continued at five-year lows. Given our higher distillate production relative to our peers, we’re at a competitive advantage. The refining segment ran well. We achieved a record total throughput during the quarter. Joseph will provide more details on our refinery operations in his remarks.

In logistics, we are investing in continued growth of our business. We benefited from our favorable permit location, which led to another record quarter. Given our strong portfolio performance, we are confident in DKL’s ability to exceed $100 million in quarterly EBITDA run rate by the fourth quarter of this year. Moving to slide four, reflecting on my first year as CEO of Delek. We have much to be proud of. When I return to Delek, I outlined my focus areas, safe and reliable operations, being shareholder-friendly and having strong balance sheet, unlocking the sum of the part value and improving the efficiency of our cost structure. We are very focused on these objectives. Our dedication to seek each one of them to completion has not wavered.

We have made progress in all of them. On the operations side, we enhanced our team with experienced talent. Together, we streamlined the structure and process toward our operation. This has led to a strong safety results. We achieved a total record throughput in our refining system. Earlier in the year, we successfully completed the Tyler turn out with their recordables on time and on budget. Post turnaround, the refinery is performing at higher yield and most importantly, record capture rates. On financial and shareholder returns. Over the past year, our logistics business achieved record EBITDA quarters. In Q3, retail achieved its highest EBITDA since COVID. We continue to be shareholder-friendly. 2 October, we repurchased $85 million of shares and including the latest increase raised the dividend five x in a row.

We improved our financial position by using our strong cash flow to reduce our net debt by $476 million during the year. On a strategic point of view, our $100 million cost reduction effort are well underway, and we are seeing early results. On unlocking value from top of the part, we have a clear strategy, and we are well on our way to meet our objectives. As you can see, we have been consistent. This resulted in tangible progress. Importantly, the achievements I just outlined position us well for the mid-cycle market environment, both from an operation and financial standpoint. In closing, we are pleased with our strong quarter. We will continue to drive further improvements and unlock value from our business. Now I would like to turn the call over to Joseph, who will provide additional detail on our operations.

Joseph Israel: Thank you, Avigal. Moving to slide 5. In the third quarter, our team processed a record high 306,000 barrels per day of total throughput. The focus on people, process and equipment helps us to build a solid organization to support safe and reliable operations. In the third quarter, the combination of favorable market conditions and strong operations performance led to $286 million of adjusted EBITDA contribution by the refining segment. In Tyler, total throughput in the third quarter was approximately 76,000 barrels per day. Production margin in the quarter was $23.66 per barrel reflecting improved reliability, yield recovery and a strong capture rate of 73%. Operating expenses were $4.74 per barrel including elevated utility cost at approximately at $0.50 per barrel due to high demand for electricity in the state of Texas late in the summer.

In the fourth quarter, the estimated total throughput in Tyler is in the 73,000 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 $12.57 per barrel. Operating expenses were $4.36 per barrel. Estimated throughput for the quarter or the fourth quarter is in the 81,000 to 84,000 barrels per day range. In Big Spring, total throughput for the quarter was approximately 65,000 barrels per day, driven by maintenance work, but still well within our guidance range. Our production margin was $15.92 per barrel including an estimated unfavorable $3.50 per barrel impact from the maintenance activities. Operating expenses in Big Spring were $1.37 per barrel, including approximately $0.80 per barrel of the unplanned activities and an additional $0.70 per barrel related to the elevated utility cost.

In October, we completed a planned outage to replace a reformer catalyst and a couple of reactors. As a result, the estimated fourth quarter throughput in Big Spring is in the 61,000 to 64,000 barrels per day range. We are very excited with our progress in Big Spring refinery. We have the right leadership team in place and we are pushing operational excellence to the next level. In the third quarter, we already improved throughput, capture and OpEx compared with the second quarter. And going forward, we are planning for the following improvements at the controllable level. Throughput up, approximately 5,000 barrels per day from our yield to-date 66,500 barrels per day performance level. Capture, up 15% to 20% from our year-to-date 52.6% level.

We are expecting to realize 65% of the improvement in 2024 and the remaining 35% in 2025. In Krotz Springs, total throughput was approximately 81,000 barrels per day. Our production margin was $12.45 per barrel and operating expenses were $5 per barrel. Planned throughput in the fourth quarter is in the 77,000 to 81,000 barrels per day range. In the third quarter, wholesale and asphalt marketing added about $35 million for the refining segment earnings compared with $80 million in the second quarter. This results are outside of our reported margins at each of the refineries and their associated capture rates. Wholesale marketing contributed about $20 million, down from approximately $60 million in the second quarter, and asphalt marketing contributed approximately $15 million compared with about $20 million in the second quarter.

Contribution of both businesses was impacted by rising oil price, but more importantly, allowed us to pull inventory even with record high throughput of our refining system. The resilient demand in our niche markets and the access to rack blending are a significant strength of our integrated downstream business model. With regards to the fourth quarter, our refining system plant throughput is in the 292,000 to 305,000 barrels per day range. We are well positioned to capture strong distillate margin environment with our 42% distillate yield capability. As a reminder, no major turnaround is planned until the fourth quarter of 2024 in Krotz Springs. In PKL, the team delivered another record quarter under operational excellence focus and growth.

I will now turn the call over to Rosy, for the financial variance.

Rosy Zuklic: Thanks, Joseph. Starting on Slide 6. For the third quarter of 2023, Delek US had a net income of $129 million or $1.97 per share. Adjusted net income was $132 million or $2.02 per share and adjusted EBITDA was $345 million. Cash flow from operations was $433 million. On Slide 7, we provide a waterfall of our adjusted EBITDA by segment, from the second quarter to the third quarter of 2023. The increase was primarily from improved results in refining, driven by higher throughput in Krotz in the third quarter. Logistics had a record quarter at nearly $97 million and Retail had another strong quarter with EBITDA of $16 million. Corporate segment costs increased compared with last quarter, largely due to bonus accruals.

Moving to Slide 8 to discuss cash flow. We built $80 million in cash during the quarter, ending the third quarter with a balance of $902 million. The $433 million in cash flow from operations reflects the strong performance of the quarter. Included in this amount is $177 million in favorable working capital. This was largely from improved inventory management. Investing activities of $59 million is mainly for capital expenditures. Financing activities of $294 million primarily reflects paydown of debt and return to shareholders. This includes $176 million of debt repayment, $25 million in buybacks, $15 million in dividends and $10 million in distribution payments. On Slide 9, we show capital expenditures. Year-to-date, total company, we have spent $302 million.

We estimate the full year CapEx to be in the range of $380 million to $390 million before any reimbursement. We expect to receive approximately $20 million of insurance proceeds, growth CapEx partially funded by producers as well as other reimbursements. Including this, net capital expenditures for the year, is in the range of $360 million to $370 million. Net debt is broken out between Delek and Delek Logistics on Slide 10. During the quarter, we built $80 million of cash and paid down $176 million of debt, ending the quarter with a net cash position. Slide 11 covers outlook items for the fourth quarter of 2023. In addition to the throughput guidance Joseph provided, we expect operating expenses to be between $210 million and $220 million, G&A to be between $65 million and $70 million, D&A to be between $90 million and $95 million, and net interest expense to be between $80 million and $85 million.

We will now open the line for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Manav Gupta with UBS. Please go ahead.

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Q&A Session

Manav Gupta : Hey guys. First of all, congrats big improvement from both Tyler and El Dorado. So help us understand what were the factors helping you out over there? And then as it relates to Big Spring was it just a turnaround, and we shouldn’t be worried that when you actually start running hard in 4Q, some of the issues you saw would be behind you, so if you could talk about those things?

Avigal Soreq : Hey, Manav, it’s Avigal. Thank you for the question. And yes, you’re right. We see a big improvement both places and that we can address for a few areas on Tyler lot of work that’s being done over the turnaround, we see the fruit of it, both on the product mix and the yield. Obviously, we are very fortunate with the Tyler market over there. We see the city growing and our ability to deploy a product just great. So that’s a very solid market. In El Dorado, to be honest, El Dorado is a great asset with capabilities, hydrogen plant, reformer and other great assets that we are just starting to tap into what we can make out of it, and we are very optimistic about that as well. I think that Joseph touched a little bit on Big Spring in his prepared remarks, but the allow Joseph to finish the answer.

Joseph Israel : Yes. Thank you. We are very excited with our progress. So when you look at Tyler, our 45% distillate yield is a big plus, especially end of the third quarter going to this quarter and for the future curve side. Obviously, the lower the oil price and a better margin environment also supported our capture, both in Tyler and El Dorado. With regards to Big Spring, we are very, very happy with the progress here. We have the right management team. We feel that things are under control as we implement best practice. And we are very confident to share with you our plans in Big Spring is increasing throughput and expecting a much higher capture rate. And to answer your question, we are not worried about the turnaround being about two years from now. We feel good about the mechanical integrity and our ability to operate it at the higher bar. So excited.

Manav Gupta: Perfect. My quick follow-up here is, as it relates to supply, marketing and other, which was formally your trading and supply. A big swing quarter-over-quarter. I know behind the scenes, Rosy has been working very hard in trying to expand the street what are the metrics that drive that performance. But if you could help us understand some of the reasons there was such a big swing in this segment quarter-over-quarter.

Avigal Soreq : Yes. Thanks, Manav. And obviously, in that line, there would be a bit more volatility than other lines. And but Joseph, I know that you have a lot of passion around it, why don’t you give a more wider view

Joseph Israel : Okay. So we provided information about the asphalt and wholesale marketing results. Asphalt made $15 million in wholesale marketing made $20 million. Both are lower than previous quarter results due to oil price increase. And you know that lag in pricing provide always a headwind for this type of businesses. The other component in supply and marketing results is the inventory management and the derivatives to really mitigate a risk.

Manav Gupta: Thanks guys. Congrats on a good quarter and good to see a pay down of debt. Thank you.

Avigal Soreq: We appreciate it, Fandav. Have a good evening.

Operator: Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta: Yeah, thank you. And hope everybody’s family is doing okay back home, Havagal in particular.

Avigal Soreq: Thank you for the warm welcome. Appreciate it. Thank you.

Neil Mehta: Awesome. Hey, Soreq, again, a very good quarter there at Tyler. We just love your perspective on the markets right now. We see this big dislocation in cracks between gasoline and distillate and how does this play out as we move into 2024? How much of the weakness in gasoline is just seasonal? As we’re trading winter grade versus something more structural and then do you see the distillate side of the equation normalizing, given the weakness in gasoline through yield switch? So just talk us through the product markets and how they evolved as we set up into 2024.

Avigal Soreq: Yeah. And I would love to do that. Obviously, ULSD as you can all see is in the five year low in terms of inventories that determine the majority of the crack. The way we see it on the distillate, obviously we don’t really know what the winter in Europe is going to yield, but that’s another upside if it’s going to yield for a colder winter. On the gasoline side, obviously we’ve seen, and we said that in the prepared remarks, we’ve seen a weakness. Some of that, as you mentioned, is seasonal and some of that — I think most of it is seasonal. We believe that the demand for gasoline is solid. Our markets are pretty much resilient for demand. You can see another testimony that we were able to deploy our — to reduce inventory, while other companies had a problem to deploy products.

So that’s another testimony to our market resilience. And this is more micro than macro, but that’s another something to note. The demand in the US as we see it is still very solid. And I think the market they’re going to correct itself. I think that we see more supply going off the market, as I mentioned a few times during COVID versus the change in demand. So overall, we think it’s the right place to be.

Neil Mehta: Thanks guys. The follow-up is just on how we’re thinking about unlocking some of the parts’ value. You, Avigal, spent a bunch of time talking about this as you stepped in, you know, how do you transfer some of the value that fits that DKL and accrued to the DK at the parent level? Talk about the different strategies that you’re approaching this with? And what ending are you in terms of actually unlocking that value?

Avigal Soreq: Yeah. So Neil, you know that I said many times, and that’s our commitment. We’re going to make it happen. We’re going to make the right thing happen for both shareholders. And we didn’t change our mind or went in other direction that’s going to happen. I will start and then I know Mark wants to have a lot of energy on that and wants to say a few words about that as well. But please remember that while we are still working on that very hard, we came up with a cost reduction, which is a great thing for mid-cycle if it presents itself. The Safe and Reliability Initiative yields in a higher throughput and we obviously, have a inventory reduction in order to enhance the balance sheet. And I’m very proud of Reuven and his team being able to be at the net zero debt on the DK level.

Saying all of that, some of the parts and allowing the value to build – the DK to build the Delek side is going to happen. And maybe, Mark, do you want to say a few words around that.