Delek US Holdings Inc

NYSE:DK

Thank you for standing by. My name is JL, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DK Fourth Quarter 2024 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Robert Wright, Deputy Chief Financial Officer. You may begin.

Good morning, and welcome to the Delek US Fourth Quarter Earnings Conference Call. Participants joining me on today's call will include Avigal Soreq, President and CEO; Joseph Israel, EVP, Operations; Reuven Spiegel, EVP and Chief Financial Officer; and 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 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 with in our SEC filings. The company assumes no obligation to update any forward-looking statements.

I'll now turn the call over to Avigal for opening remarks. Avigal?

Thank you, Robert. 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 for us. We have vastly improved our operational performance, made significant progress on some of our past 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, safe and reliable 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 its reliability. We have consistently been running over 70,000 barrels per day.

Looking forward, in 2025, we have no major turnaround planned in our system, and we expect to continue our improvement journey.

Now, I would like to discuss our sum of the part 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 $390 million, and we are extremely happy with the timing and the value we received. The timely sale has allowed us to continue to progress our initiative in a tough refining environment.

We've 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 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 7-years.

Our economic separation from DKL is increasing, and at the same time, the distribution DK received from DKL continues to grow. DKL also announced 2 accretive acquisitions to add around $100 million in third-party EBITDA.

After DKL acquisition of Gravity Midstream, DK ownership in DKL has come down to 63.6%. DKL is progressing its capacity expansion in the Libby gas processing complex and expect to complete the expansion in the first half of 2025, as previously communicated.

Additionally, DKL announced an FID on acid gas injection at the Libby complex in December. These steps highlight DKL's progress in becoming an attractive, high-growth, mid-sized, mid-frame 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 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 DK share price and DKL unit price. We are confident that, we'll complete the DKL deconsolidation in a methodical manner and create value for both shareholder and unitholder.

In 2024, we have made progress in improving overall profitability of the company. We completed our zero-based budget initiative, which allowed us to save around $100 million in cost 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 delivery effort laid the foundation for our Enterprise Optimization Plan, or EOP. EOP aims to improve DK cash flow by $80 million 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 for further improve our cash generation power as we progress through the year.

Final piece of our strategy is being shareholder friendly and having strong balance sheet. During the quarter, we paid $16 million in dividend 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 the comment about small refinery exemptions. As you know, the D.C. 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're optimistic that the EPA will revise its approach following the court ruling and grant us SREs.

We hope the recent ruling on SREs, along with Supreme Court ruling on Chevron deference case, will reduce unneeded bureaucracy and allow for 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 of DK in 2025 and beyond.

Now, I will turn the call over to Joseph, who will provide additional color on our operations.

Thank you, Avigal. First, I'd like to congratulate our team on another safe, reliable, and environmentally compliant year. Our progress in hiring the right people, developing good processes and proactively managing our equipment is well reflected in the field and 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 plant maintenance in the Alky unit, including an upgrade scoop, 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.

Progress in Big Spring is well reflected in the numbers. Total throughput in 2024 increased over 10% compared to 2023 due to improved reliability.

Cost structure is approaching our target. And as important, it is mostly driven now by a routine and proactive agenda rather than reactive.

In the first quarter, we are replacing catalysts 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 Krotz 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 our system racks. $22 million loss was attributed to supply, and a negative $0.5 million contribution was generated by asphalt.

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 the future cycles.

I will now turn the call over to Robert for the financial variances.

Thank you, Joseph. I will start by referring to Slide 14. For the fourth quarter, Delek had a net loss of $414 million, or 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 15, the waterfall of adjusted EBITDA from the third quarter of 2024 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, we continue to have another strong quarter, delivering $107 million in adjusted EBITDA.

Moving to Slide 16 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 movements, which include the impacts of the inventory intermediation agreement.

Investing activities of $216 million includes 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 reflects 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 17, 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 spend associated with the construction of the Libby 2 gas plant, which remains on track from a timing and cost perspective.

As we have previously announced, our stand-alone 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 18.

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 19, 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. D&A is expected to be between $100 million and $105 million and net interest expense to be between $78 million and $88 million.

We will now open the call for questions.

[Operator Instructions] Your first question comes from the line of Manav Gupta of UBS.

I wanted to focus a little bit on Slide 10. 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?

Yes. Manav, thank you for your question. El Dorado is a big focus for us. Joseph leading that with a lot of talent, and I will allow Joseph to chime in.

Yes. 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 Asphalt areas.

On the logistics front, we put together new logistics, 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 of low-hanging fruits, we are confident about our ability to translate this progress to numbers sooner than later.

Perfect, guys. A quick follow-up here is, it looks like you're growing DKL EBITDA, although you're divesting it down slowly. Is the strategy here to look for smaller bolt-on deals, whether it's water, crude, gas and basically continue to grow the company at the DKL level and at the same time, try and bring down the ownership below 50%?

Yes. So Manav, I will take that question. And I would like to give you a bigger answer than that about some of the part efforts we are doing. And some of the parts together with EOP are the most strategic initiative we have for this year, 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 action that we did around that, 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 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, 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 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 efficient tax way for DK to sell back their units to DKL. So we announced it today for $150 million -- up to $150 million.

So the other -- and that's benefit for DK for the efficient way, and it's also a benefit for DKL, because of free cash flow, right? You're avoiding at 7% -- you are avoiding at 7% and you're avoiding a cost of 10% or 11%. So that's very beneficial for both companies.

And the last point, I want to make 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 is that, he was going to be very busy in 2025 as well. So I'll let Mark chime in.

Yes. Thanks, Avigal. And look, Manav, we're very happy with our sum of the parts efforts in 2024, and we're very active in the year in advancing our deconsolidation efforts. Both H2O and Gravity checked all the boxes, and what we look at for acquisitions, 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 processing capacity and to also add critical sour gas capabilities. And finally, dropped 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 DK 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, as you know, is the core of our DKL operations.

And as Avigal said, our focus is that, we're going to continue our measured approach to deconsolidation and the focus is going to continue on enhancing and maximizing value for both DK shareholders and DKL unitholders.

Your next question comes from the line of Matthew Blair of TPH.

I was hoping to 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?

Matt, 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 $10 million better this quarter versus last quarter. So that's a very good step on the right direction. And I will let Pat Reilly, our Chief Commercial Officer, to chime in into that answer and give you some color.

Thank you, Avigal. Fourth quarter DKTS performance was impacted primarily by seasonal inland demand weakness led by the group and a onetime major turnaround across. And with that said, DKTS made significant progress on our 2024 initiatives.

As Avigal just mentioned, supply and trading market conditions in Q4 was significantly weaker relative to the same time period in 2023. So as an example, group diesel weakened by $0.14 per gallon, that's almost $6 a barrel year-on-year.

Now, despite these headwinds, DKTS 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. To intelligently streamline operations, thereby reducing costs, further increase our margins on the back of optimization of supply and trading, lean into our partnership with our assets to flex our broader product offering and further mature DKTS' newfound and expanded market reach. We're excited for the commitment and the challenge.

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

That's not on our table distant second. If something change, we'll definitely let you know, but it's not -- and maybe, Mohit, do you want to chime in on that?

Yes, 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 3 months, and then we have around 90 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 are just hoping for the team to have those operations in order before we start making our decisions.

Your next question comes from the line of John Royall of JPMorgan.

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. And maybe how should we think about that OpEx number as we progress further into 2025 beyond that 1Q guide?

Absolutely, John. Thank you for the question. Mohit was putting the guidance together, so I'll let him chime in. Please, Mohit.

Yes, John, thanks for the question. So as far as our company is concerned, OpEx and cost reduction, we are taking a lot of pride in it. And you're seeing the results through EOP. You have seen the results through ZBB.

As far as your specific question around Q1 guidance is concerned, so there are 4 factors which are influencing the guidance. The first one is, as you know, that we closed Gravity Water Midstream, and we're presenting the guidance on a consolidated basis.

So you're seeing some OpEx coming from Gravity Water Midstream. Second, we are running higher throughput quarter-over-quarter. So that's also influencing our OpEx number. Third piece is natural gas. As you've seen, natural gas prices have gone a little bit higher. So 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 OpEx reductions are contributing to EOP and our free cash flow generation, and we look forward to updating you guys more on that.

Great. Very helpful, Mohit. And then my 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 million to $480 million to $520 million?

Yes, 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 economical separation between the companies and we are doing that very methodically and to benefit both unitholder and shareholder as you see by all the actions that we have done in the last 18 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, and to be able to understand the value creation that was done here. So we're taking a lot of pride of what we are doing here. We think the guidance we gave you is solid and good. And Mohit, do you want to chime into that as well? If there is more modeling question, we can take it offline, obviously.

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

Your next question comes from the line of Doug Leggate of Wolfe Research.

This is [ McKinley ] on for Doug. He sends his regards. He's traveling at the moment. My first question is kind of piggybacks on some of the 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. Where are you in the process, for example, with the sour gas permitting? And is there a kind of line of sight on potentially other sellable assets going forward?

Yes. So you started your question with the EOP. So I will start my answer with the EOP, and I will give you some broader context around that, right? So, especially on 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 have seen a 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 a 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 are 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 pretty neutral to market condition and all the actions that we are doing here are new action that was not done in the past. So we are very optimistic. And Reuven is very close to that and help managing that very nicely, and I will let him chime in on that.

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 2 ways: one, that it's sustainable; and 2, that is, for the most part, market agnostic. Once vetted, it goes into execution and added to the projections.

You can see on the deck that we provided, it's reflected in Slide 9 in the green boxes. Each project has a different time frame for fruition. That is why we are measuring third and fourth quarter run rates.

As for DKL, we have the sour gas plant, which our team is executing on time, on budget and is expected to flow in the second quarter. And that gives us a whole new dimension and flexibility around gas in -- around gas, sorry.

Your next question comes from the line of Jason Gabelman of TD Cowen.

I wanted to ask about the DKL repurchase program of DK units. I'm wondering, one, what the time line is to deploy that buyback cash? And 2, once DK gets that cash, what it's going to use that cash for?

Yes. Thank you for the question. The time line that we put that program in is all the way until 2026. Obviously, it's a DKL option, but we are very close to that. So we'll do that when time is right. But you probably can appreciate that, that's another tool in our toolbox that benefit the deconsolidation for both companies and help free cash flow of both companies. So that checks many, many boxes. And it's very tax efficient. I think you can be proud of a very creative way how to create deconsolidation with no tax impact basically.

But I want to take the other part and to 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 throughout 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 buybacks at 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.

Great. No, yes, I appreciate the color on the capital allocation. The other question is just back to Group 3 dynamics. And it sounds like in a weaker inland margin environment, you see some weakness in that supply line item. And I wonder, kind of post-COVID, we've seen inland markets become more seasonal where they're 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?

Yes. So listen, there are 2 different questions here. Market observation, there is some truth that there is a weakness in the winter and the strength in the summer. But I'm not going to provide -- we are not going to provide guidance for DKTS. We didn't do that in the past, and I don't think its best practice in the market. We are not going to deviate from that today.

But I'm going to 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 and different market 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.

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

Yes. 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 a great execution and a great commitment for 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, and we'll see you next in the next quarter. Thank you.

This concludes today's conference call. You may now disconnect.