Delek Logistics Partners LP

NYSE:DKL

Earnings Call Transcript 2022-Q2

[Operator]

Good day and welcome to the Delek Logistics Second Quarter 2022 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Blake Fernandez. Please go ahead.

[Blake Fernandez, Investor Relations]

Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners’ second quarter ‘22 financial results. Joining me on today’s call will be Uzi Yemin, our General Partners Chairman; Avigal Soreq, President; Reuven Spiegel, CFO; and other members of our management team.

As a reminder, this conference call will contain forward-looking statements as that term is defined under federal securities laws, including, without limitation, statements regarding guidance and future business outlook. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in the company’s most recent filings, annual report and Form 10-K or quarterly report on Form 10-Q filed with the SEC, along with the press release associated with this call. The company assumes no obligation to update any forward-looking statements or information, which speak of their respective dates.

On today’s call, we will begin with comments from both Uzi and Avigal, then Reuven will provide a financial overview, and I will review results and then we will have a Q&A session.

With that, I will turn the call to Uzi.

[Uzi Yemin, General Partners Chairman]

Thanks, Blake and good morning, everybody. DKL has delivered consistent results through various business cycles. Elevated global commodity price and geopolitical unrest underscore the benefits and reliance upon traditional energy assets, including midstream infrastructure.

DKL is well-positioned to benefit from increasing activity in the Permian Basin and the 3 Bear assets over additional growth opportunities, both geographically and in new product lines. The significant increase in third-party revenue from the production helped propel DKL towards more of a true standalone entity. This should help the things which DKL from other sponsor-based MLPs and attract capital with the diminishing number of MLP investment options.

The company is positioned well and this is an opportune time to hand the reins to our new President, Avigal Soreq.

[Avigal Soreq, President]

Thank you, Uzi and it’s great to be back again. Unitholder returns have been a critical part of the DKL story since going public. We increased the quarterly distribution 38x in a row, and we remain on track to deliver a 5% increase year-over-year. On an annualized basis, this puts our dividend yield around 7%. On June 1, we closed the 3 Bear acquisition. I would like to welcome the 3 Bear team to the Delek family. This is an exciting addition to our portfolio that adds increased third-party revenue, expanded product mix into natural gas and water and widens our footprint into the Delaware Basin.

On our legacy Permian Gathering system, we continue to see a strong demand from producers and expect ongoing volume increases. The outlook remains solid. And we are focused on operating the assets safely and reliably while integrating the new 3 Bear assets. I am looking forward to working closely with our team to continue to produce positive results for our unitholders and maximize the value of the company. Finally, I would like to thank Uzi for many years of leadership and mentorship.

With that, I will turn the call over to Reuven.

[Reuven Spiegel, Chief Financial Officer]

Thank you, Avigal. Our distributable cash flow as adjusted for 3 Bear transaction cost was approximately $56 million in the second quarter of 2022. That compared to $54 million in the second quarter of ‘21. Our DCF coverage ratio as adjusted for transaction cost was 1.3x for the second quarter compared to 1.32x for the prior year period.

EBITDA was $65 million, which includes $6.2 million of transaction costs associated with the 3 Bear acquisition. Our Board approved an increase in the quarterly distribution to $0.985 per limited partner unit for the quarter ended June 30. This distribution will be paid on August 11 to unitholders of record as of August 4, 2020 and we remain on track to deliver our 5% target year-over-year.

At June 30, ‘22, DKL had $119 million available capacity on our $1 billion credit facility. Our total debt was $1.5 billion. And the total leverage ratio was approximately 4.7x, which is well within the 5.5x currently allowable under our credit facility. Please note that the balance sheet reflects the 3 Bear acquisition, which closed on June 1. This resulted in an increase in the leverage ratio, which we expect to reduce over time.

Now I will turn the call over to Blake to discuss the results.

[Blake Fernandez, Investor Relations]

Thanks, Reuven. In our Pipelines and Transportation segment, the second quarter ‘22 contribution margin was $48.4 million compared to $45.2 million in the second quarter of last year. The increase was primarily attributable to strong refinery utilization rates at Delek US.

In our Wholesale Marketing and Terminalling segment, contribution margin was $16 million in the second quarter of this year compared to $19 million in the second quarter of last year. The decrease was primarily driven from lower margins in the West Texas wholesale business. During the second quarter of ‘22, equity income from our crude oil joint venture pipelines was approximately $7.1 million compared to $6.6 million in the prior year. This increase was mainly driven by strong volumes at both Caddo and Red River joint ventures.

Moving to capital expenditures. We spent around $26.7 million in the second quarter of this year, which consisted of $26.3 million of growth spending and $400,000 for sustaining maintenance. The outlook for ‘22 includes total gross capital expenditures of $116 million, including $108 million of growth and $8 million of maintenance capital. This reflects the early closing of the 3 Bear acquisition and additional growth opportunities in the legacy Permian Gathering business. Based on strong producer demand, we now expect to double DPG volumes from the fourth quarter of ‘21 levels by the end of the third quarter of ‘22.

With that, operator, can you please open the call for questions?

[Operator]

Thank you. [Operator Instructions] Our first question comes from Michael Cusimano with Pickering Energy Partners. Please go ahead.

[Michael Cusimano, Pickering Energy Partners]

Hey, good morning. I just had one question on the doubling of Permian Gathering volumes. Quarter-to-quarter, it looks like volumes were a little flat. So I was hoping you could talk through what that ramp looks like and maybe some of the drivers driving the big hockey stick, if you will, going into next quarter?

[Odely Sakazi, Senior Vice President]

Sure. This is Odely. I think what you need to look at is both what we see both on the pipeline and also on the trucking. And this is also what we look on – both on Q4 and also what we are expecting to have in Q3. So if we are combining both the pipeline production along with also the trucking production, this is where we are getting into those levels.

[Michael Cusimano, Pickering Energy Partners]

Okay, got it. That’s helpful. Thank you.

[Blake Fernandez, Investor Relations]

Thanks, Michael.

[Operator]

As we see no questions at this point, this concludes the question-and-answer session. I would like to turn the conference back over to Avigal Soreq for any closing remarks.

[Avigal Soreq, President]

Thank you. So I would like to thank the investors of trusting in us and joining the call to the management here on the table that worked very hard on this quarter, the Board for the big support of the Board and mostly our employees. Thank you so much and we will talk next call. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.