Delek Logistics Partners LP

NYSE:DKL

Earnings Call Analysis

Record Quarter, New Investments for Delek Logistics

Delek Logistics Partners reported a record quarterly adjusted EBITDA of $102.4 million, up from $92.8 million the previous year. The company announced three key transactions: an extension of their contract with Delek US Holdings, the acquisition of interests in the Wink to Webster pipeline, and the purchase of H2O Midstream. These moves are designed to strengthen Delek's position in the Permian Basin and are expected to be immediately accretive. Additionally, the board approved a quarterly distribution increase to $1.09 per unit. A new gas processing plant set to complete by mid-2025 is projected to generate over 20% cash returns.

A Record Quarter: Strong Financial Performance

In the recent earnings call, Delek Logistics Partners reported a record-setting adjusted EBITDA of $102.4 million for the second quarter of 2024, reflecting a notable increase from $92.8 million in the same period last year. This robust performance illustrates the company’s effective operational strategies and solid market positioning, particularly in the Permian Basin where increased throughput significantly bolstered earnings. The distributable cash flow for the quarter was reported at $68 million, with a healthy coverage ratio of 1.32x, indicating strong cash flow generation relative to distributions.

Strategic Acquisitions and Investment Plans

A cornerstone of the call was the announcement of several strategic transactions aimed at enhancing Delek's market capabilities. Most notably, the company plans to acquire H2O Midstream for $160 million in cash and $70 million in preferred equity. This acquisition is expected to be immediately accretive to both EBITDA and free cash flow, strengthening Delek's position as a more independent midstream entity. Furthermore, the company has announced plans for a new gas processing plant scheduled for completion in the first half of 2025, projected to generate cash-on-cash returns exceeding 20%.

Contract Extensions and Future Stability

An important aspect discussed was the amendment and extension of the contract between Delek Logistics and its parent company. This move transitions from a month-to-month agreement to a more stable contract term of up to seven years for the Wink to Webster pipeline. Such long-term contracts not only alleviate uncertainty and potential risks associated with revenue generation but also enhance asset quality significantly, given the pipeline's backing by investment-grade counterparties.

Capital Expenditure and Growth Strategy

For the second half of 2024, Delek has indicated planned capital expenditures between $90 million and $100 million towards new growth projects in the Midland and Delaware gathering systems. This commitment underlines the company’s strategy to bolster its operational capability and increase throughput capacity, emphasizing their proactive approach to capture future demand in a growing market.

Enhancing Operational Synergies

Management highlighted the expected operational synergies arising from the H2O Midstream deal, which integrates capabilities across its service offerings. This synergy is anticipated to improve efficiency and lead to better customer engagement, allowing Delek to offer a full suite of services. The emphasis on operational efficiency reflects a clear understanding of market dynamics and customer needs, further positioning Delek Logistics for future growth.

Looking Forward: Guidance and Market Outlook

As Delek Logistics looks to the future, guidance on EBITDA from the H2O Midstream acquisition ranges between $55 million and $85 million, depending on the realization of various operational synergies. The midpoint of this range will provide a reliable baseline for performance metrics going forward, with management signaling confidence in establishing Delek’s position within the midstream sector. Overall, the strategic focus on increasing independent operations and enhancing cash returns paves the way for sustained value delivery to unitholders.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Joel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners Q2 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Robert Wright, Deputy CFO. You may begin.

[Robert Wright, executive]

Good morning, and welcome to the Delek Logistics Partners Second Quarter Earnings Conference Call. Participants joining me on today's call will include Avigal Soreq, President; Joseph Israel, EVP Operations; Reuven Spiegel, EVP and Chief Financial Officer; and Odely Sakazi, SVP Delek Logistics.

As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including statements regarding guidance and future business outlook. These statements involve risks and uncertainties that may cause actual results to differ from our forecast. For more information, please refer to the risk factors discussed in the partnership's most recently filed annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC, along with the press release associated with this call. The partnership assumes no obligation to update any forward-looking statements or information.

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

[Avigal Soreq, executive]

Thank you, Robert. Delek Logistics Partners had another record quarter. We reported $102.4 million quarterly adjusted EBITDA. I am pleased with our continued performance. We have made several announcements today. DKL is a premier full-service crude water and natural gas provider in the prolific Permian Basin. And the transaction we have announced today will significantly enhance our position.

First, let's talk about the contract between DKL, DK and Wink to Webster pipeline. We announced an amend and extent of the contract between DKL and DK. The extensions remove an overhang on the DKL unit. It moves away from a month-to-month to contract terms of up to 7 years. These amendments allow us to acquire DK's interest in the W2W pipeline without significant strain on our balance sheet. W2W is a premier crude oil pipeline backed by investment-grade counterparties. It increases the overall asset quality at DKL and enhance DKL Permian position.

Second DKL announcement today is the investment in the new gas processing plant. This plant is highly subscribed and is estimated to generate cash on cash returns of more than 20%. We are looking to complete the plant during the first half of 2025.

The last transaction DKL announced today is the acquisition of H2O Midstream for $160 million of cash and $70 million preferred. The transaction is immediately accretive to DKL on an EBITDA and free cash flow basis. The acquired asset fits very well within DKL existing footprint.

As such further expand our capabilities to be a comprehensive provider of midstream services in the Permian Basin. Once this transaction are complete in the first half of 2025, a majority of DKL EBITDA will be from nonrelated parties, making DKL mostly independent midstream company. In July, the Board of Directors approved an increase in the quarterly distribution to $1.09 per unit. Delek Logistics has shown a strong track record of delivering value to unitholders.

We are excited about the announcement that we have made today and the opportunities ahead of us. I want to welcome the H2O team to the DKL family and wish them continued success and good luck.

I will now hand it over to Reuven.

[Reuven Spiegel, executive]

Thank you, Avigal. As Avigal mentioned, we are growing Delek Logistics with a prudent management of liquidity and leverage. The liquidity we created in the beginning of the year has allowed us to carry out a transaction we have announced today. We are also managing our leverage which has improved to 3.81x at the end of the second quarter of '24 from its high point of 4.84x at the end of '22 and 4.34x at the end of '23.

Moving on to our second quarter results. The second quarter adjusted EBITDA was $102.4 million compared to $92.8 million in the same period of 2023. The distributable cash flow was $68 million and the DCF coverage ratio was 1.32x. For the Gathering and Processing segment, EBITDA for the quarter was $54.7 million compared to $52.6 million in the second quarter of '23. The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets.

Wholesale Marketing and Terminalling EBITDA was $30.2 million compared to $28 million in the prior year. The increase was primarily from higher Terminalling utilization. Storage and Transportation EBITDA in the quarter was $16.8 million compared to $15 million in the second quarter of '23. The increase was mainly driven by higher storage and transportation rates. And lastly, the investment in pipeline joint venture segment contributed $7.9 million this quarter compared to $7.3 million in the second quarter of '23.

Moving on to capital expenditures. The capital program for the second quarter of 2014 was $10.2 million. Most of the spend in the quarter was for growth projects, namely advancing new connections in the Midland and Delaware gathering system. Along with our previously announced capital budget for '24, we expect to spend $90 million to $100 million in the second half of '24 on new processing plant.

With that, we can open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Neal Dingmann of Truist Securities.

[Neal Dingmann, analyst]

First question is just on the H2O Midstream acquisition, which looks very attractive. Just wondered, maybe can you talk a little bit about -- you mentioned here about the new full suite of services, how that improves sort of opportunities. I'm just wondering how that will improve as you have future customer opportunities. And then secondly, you all talked about the potential near-term costs and revenue synergies. I'd love to hear maybe more about that.

[Avigal Soreq, executive]

Absolutely, Neal. So 3 aspects to that. One, the same customer, you can have a more comprehensive view about deals that you are doing with customers. The second point around that is that basically the operational are on the top of each other, so you can be very efficient on the way you run your operations. And the third, this infrastructure can be relevant for both services. So this is accretive, very accretive deal for us, and it is extremely synergistic.

[Neal Dingmann, analyst]

No, I would agree. And then secondly, just on the new Delaware gas plant. What could the timing be? I know maybe jump in again a little bit on this one, but I like that -- I think there is a future additional gas processing opportunities you all could have around there beginning next year after you close. And I'm just wondering what -- how soon could you see some of those future gas opportunities? And what might that consist of?

[Avigal Soreq, executive]

Yes. So our gas plant is completely synergistic with the current gas plant we have. We said that we're going to complete in the second -- in the first half of 2025. And it's already been nicely subscribed. Odely, I don't know if you want to add into that.

[Odely Sakazi, executive]

Yes, just a little bit. And to your comments, Neal, to be honest, right now, we already have the associated need for additional capacity from what we're seeing with our producer currently and also going forward. So this is why we feel very comfortable on the volume on that new plant that is already highly subscribed as Avigal mentioned. So we see that timing pretty much as soon as possible from our stand.

[Neal Dingmann, analyst]

Great guys. Nice additions on both sides.

[Operator]

Your next question comes from the line of Doug Irwin of Citi.

[Douglas Irwin, analyst]

I just wanted to touch on the $55 million to $85 million EBITDA range you provided for the transaction this morning. I was wondering if you could talk about some of the assumptions for the high end versus the low end of that range. Is that mostly dependent on some of the H2O Midstream synergies? Or are there maybe some other factors under consideration there? And then should we expect that to kind of be a good run rate for '25? Or is that ramping over time?

[Avigal Soreq, executive]

So there are 3 main components around that, right, like we outlined. One is the DK contract amend and extend. Second is the W2W and third is the H2O Midstream and fourth is the gas processing plant. What I think the majority of that is not coming from synergies is coming from the base business. And we -- and I think that a good estimation is to take the midpoint out of that. It's a good number to assume going forward.

[Douglas Irwin, analyst]

Okay. Great. That's helpful. I was just wondering if you could provide a little more detail around the funding expectations for the cash component of these transactions. And if I look at Slide 6 in the presentation materials, it looks like maybe some units are changing hands here as part of the Wink to Webster and recontracting. Just wanted to clarify I'm interpreting that correctly. And so maybe get a little more detail around how that might play into the deconsolidation priorities of the DK.

[Avigal Soreq, executive]

Yes, absolutely. So there are units that are changing hands, but the net amount is not big between the company. So it's like we exchange value from 1 company to another and we got it pretty tax efficient. So that's a good news. So we don't need to pay a lot of attention into that part of the equation. What we basically did, and you can appreciate that I'm sure we put the right asset under the right ownership, put W2W where it naturally belong and the exchanges for a value that belongs to the refineries.

[Operator]

With no further questions, that concludes our Q&A session. I will now turn the conference back over to CEO, Avigal Soreq for closing remarks.

[Avigal Soreq, executive]

Thank you. So I would like to thank my leadership around this table, our employees, our Board of Directors, for your investors, and welcome the H2O team the Delek, to the DKL family. Thank you, guys, and we'll talk next quarter.

[Operator]

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