Delek Logistics Partners LP

NYSE:DKL

Earnings Call Analysis

Solid Q4 Earnings and Optimistic 2024 Outlook

In Q4 2023, the company's adjusted EBITDA increased to $100.9 million, up from $92.5 million in Q4 2022. A goodwill impairment of $14.8 million was recognized due to rising interest rates. Distributable cash flow reached $65 million with a coverage ratio of 1.4%. Key segment EBITDA grew, with Gathering and Processing up to $53.3 million, Wholesale Marketing and Terminalling at $28.4 million, and Storage and Transportation at $17.5 million. The firm expects 2024's capital program to be about $70 million, including $20 million for sustaining and regulatory capital and $50 million for growth. The Board approved the 44th consecutive distribution increase to $1.055 per unit. Optimistic about the company's constant improvement, management is focusing on enhancing business opportunities and expects continued growth.

Steady Financial Performance with Optimistic Outlook

Delek Logistics Partners showcased a robust fourth quarter in 2023, with adjusted EBITDA reaching $100.9 million, representing an increase from the previous year's $92.5 million. This growth in earnings reflects the company's ability to effectively leverage higher storage and transportation rates to its advantage. The management expressed a positive outlook for 2024, focusing on consistent improvements and capitalizing on significant investment opportunities, especially in new connections for their gathering systems, which could drive volume growth in the partnership's assets.

Long-Term Commitment and Addressing Volume Declines

There's acknowledgement of natural declines in the business, notably contrasting the peak volumes in Q3 to the following quarters. This is an area to watch for investors, although the management is actively addressing these issues by advancing maintenance works and continuing investments for volume increment projects. These proactive measures indicate a management team committed to improving operations and tackling challenges head-on.

2024 Capital Expenditure Forecast and Growth Capital Allocation

For the year 2024, the predicted capital program is estimated at about $70 million, which incorporates approximately $20 million designated for sustaining and regulatory capital, and $50 million that is earmarked for growth capital. This allocation towards growth capital reaffirms the company's commitment to pursuing expansion and enhancing its competitive edge in the market.

Strategic Corporate Expense Management

Delek Logistics has been proactive in managing corporate expenses, which has seen a sequential reduction, contributing to a leaner operating structure. By embarking on a zero-based budget initiative with a target of $100 million in cost reductions, the company reflects a strong focus on financial discipline. This strategic management of expenses could stabilize or even further improve financial performance in the future, pending any official guidance from the company.

Debt Management and Leverage Improvements

The management's discussion on leverage trends and planned refinancing activities suggests a focused strategy on improving the company's financial position. With active examinations of various financial instruments and a clear goal to reduce leverage to below 4x, Delek Logistics is on track to achieving a stronger and more stable capital structure, providing reassurance for investors concerned about the company's debt levels.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Delek Logistics Partners' Fourth Quarter 2023 Conference Call.

[Operator Instructions] This call is being recorded on Tuesday, February 27, 2024.

I would now like to hand the conference over to Rosy Zuklic, VP of Investor Relations. Please go ahead.

[Rosy Zuklic, executive]

Good day, and welcome to the Delek Logistics Partners fourth quarter earnings conference call. Participants 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 without limitation, statements regarding -- 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 which speak as of their respective dates.

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

[Avigal Soreq, executive]

Thank you, Rosy. Delek Logistics Partners finished 2023 strong. We delivered another record quarter and achieved a record year. DKL exceeds $100 million in adjusted EBITDA this quarter. We saw a substantial growth from our new connection in our mid and gathering operations further validating our strong position in the Permian Basin. I'm very proud of our employees who are dedicated to making Delek Logistics succeed. It is their dedication to safe and reliable operation that makes our results possible. The team has gone without a lost time injury 4 years in a row and counting. We are also focused on growing third-party revenues allocating capital in a disciplined manner and exploring natural gas opportunities in the Delaware Basin where we see significant growth. .

In January, the Board approved the 44th consecutive increase $1.055 per unit. Delek Logistics has shown a strong track record of delivering value to unitholders. We feel confident in our ability to maintain competitive distribution to our investors.

I will now hand it over to Reuven.

[Reuven Spiegel, executive]

Thank you, Avigal. The fourth quarter of 2023 adjusted EBITDA was $100.9 million compared with $92.5 million in the same period of 2022. The fourth quarter EBITDA was $86.1 million, which included a $14.8 million goodwill impairment related to some of our Delaware Gathering and processing assets. The impairment was primarily driven by a significant increase in interest rates. Our long-term outlook of the Delaware Gathering System remains unchanged.

Distributable cash flow was $65 million and the DCF coverage ratio was 1.4%.

For the Gathering and Processing segment, adjusted EBITDA for the quarter was $53.3 million compared with $48.1 million in the fourth quarter of '22. The increase was primarily due to higher throughput from Delek Logistics Premium Basin assets.

Wholesale Marketing and Terminalling adjusted EBITDA in the fourth quarter of 2023 was $28.4 million compared with $23.3 million in prior year. The increase was primarily from higher terminal and utilization.

Storage and Transportation adjusted EBITDA in the quarter was $17.5 million compared to $16.1 million in the fourth quarter of '22. The increase was mainly driven by higher storage and transportation rates.

And lastly, the investment in pipeline joint venture segment contributed $8.5 million this quarter compared with $9 million in the fourth quarter of '22.

Moving on to capital expenditures. The capital program for '23 was $74 million. This includes $7 million of proceeds from producers to partially fund growth projects. Most of the spend throughout the year was for growth projects, namely advancing new connections in the Midland and Delaware gathering systems.

For 2024, Delek Logistics Partners expects the capital program to be about $70 million. This includes approximately $20 million of sustaining and regulatory capital and $50 million of growth capital. We will continue to advance new connection in our gathering system for the volume growth at the partnership.

With that, we can open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Doug Irwin from Citi.

[Douglas Irwin, analyst]

I just want to start with the Delaware Gathering and processing assets. Understanding the long-term outlook is still on tax. Can you maybe just talk about how the 3 Bear assets are trending today just versus the initial expectations when you acquired the -- I think the initial target for these assets when they acquired is $100 million of annual EBITDA. Is that still a good number to work with here near term?

[Avigal Soreq, executive]

Doug, it's Avigal. Thank you for joining our call. Generally speaking, the 3 Bear, now DDG is meeting our expectation. We also being over there in that area, give us insight for more opportunities we see in the region. And as you probably picked up on my prepared remarks, and there is additional opportunity mainly on the natural gas. So that was a very good position to get into it.

[Douglas Irwin, analyst]

Okay. Got it. And then just a second question just on the broader '24 outlook. You gave -- last quarter, you talked about exiting '23 at $100 million quarterly EBITDA run rate, which you achieved this quarter. Are there any similar targets you can point to moving forward, whether that's on EBITDA, volume growth or some other metric, just to kind of help frame the growth outlook for '24?

[Avigal Soreq, executive]

Yes. So -- we are focusing to have a constant improvement, and we are committed to keep improving our business. So we are very optimistic about what we see in the business on the opportunity we have seen a nice significant CapEx plan into the business that will enhance additional opportunities. But we are very optimistic, and we see a consistent and constant improvement in the business. So that's going to be what we can provide

[Operator]

[Operator Instructions] There are no further questions at this time. I will turn -- we do have one more question, I apologize, from Paul Longo from Lord Abbett.

[Unknown Analyst]

I was curious, it looked like the Midland volumes were down a little bit sequentially. And some of the gas and the water and the Delaware volumes were down a little bit sequentially. Forgive me if I missed that. What was -- why is that? And should we expect that trend to continue?

[Avigal Soreq, executive]

Yes. So thank you for joining us today. The gathering the our volume are pretty much in line quarter-over-quarter. What we see in the Permian Basin is a touch lower. And you can expect that after producers adding new production, you probably know that as good as anyone that the new production in the beginning goes to very high and then stabilize over time. So that's what we see. As you probably picked up, we have a significant capital budget that will enhance additional volume and connection in the VPG, the Midland area, and we will see volume picked up along the year.

Odely, do you want to add anything to that?

[Odely Sakazi, executive]

Yes, sure. And this is Odely. I just give a little bit more color from early on the Delaware side as Avigal mentioned. In Q4, we expedited some of our maintenance work that we plan to do in Q1 and decided to do it in Q4, that's actually helped us to continue improving volumes. So this is why you see gas, slightly lower compared to between Q4 and Q3 of this year. But if you look both in DPG and also in DDG on both sides, if you compare year-over-year, we obviously continue to improve our social performance. So for Q4, primarily, we had that work that was done that we expedited it was planning to work on the most in the plan. But as we're looking right now in Q1, there is already an improvement compared both to Q3 and also Q4.

[Unknown Analyst]

And that improvement is for both Midland and Delaware?

[Odely Sakazi, executive]

Primarily, the Delaware is Midland. As Avigal mentioned, we do see the natural decline in the business compared to the peak we've seen or compared to the volumes in Q3. With that said, we do have a capital program, as Avigal mentioned, also Reuven mentioned in his remarks, of $50 million on connection. So we should start to see an increase Permian in the second half of the year as we increment this project.

[Unknown Analyst]

Okay. Great. And then I noticed corporate expenses were down a little bit sequentially. Could you talk about that a little bit?

[Avigal Soreq, executive]

So it's -- it's an effort we are doing across the company to streamline expenses. We had a big initiative on the parent company to reduce expenses, recorded the zero-based budget with a target of $100 million. Some of that went all the way to DKL. So you see to our partnership. So you see the fruits of that. So we didn't put it on the beamboard here, but we were happy to enjoy them.

[Unknown Analyst]

Okay. Great. So we should expect expenses to kind of stabilize or maybe even continue to improve going forward?

[Avigal Soreq, executive]

Yes. I don't think we are giving guidance, but there is no reason it will go back.

[Unknown Analyst]

Okay. And then you have a few debt maturities coming up in '25. Any thoughts on those at this point in time?

[Avigal Soreq, executive]

Yes, absolutely. Maybe Reuven Director.

[Reuven Spiegel, executive]

Yes. We are actively examining various instruments. We will probably be in the market in the next few months to refinance some of the import between the term loan and the $250 billion yield. So some form of refinancing will happen this year.

[Unknown Analyst]

Okay. Great. And then my last question, you probably won't be able to say too much on it. But as you look at the sum of the parts and the strategic. Are there ways -- what is your thoughts on leverage here at DKL? And are there ways that, that could be improved as part of that? Anything you can kind of say on that subject?

[Avigal Soreq, executive]

So you can probably see the trend all that we have seen with the leverage ratio was improving quarter-over-quarter. We will continue this trend, that's our plan. And obviously, there are more ideas on the table, but once we get into a higher level of resolution, we communicate with the market. But I think that if you connect the dots that you have seen in the last year or so, you can be very pleased with the improvement in leverage ratio. We are doing that consistently quarter after...

[Unknown Analyst]

Great. And do you think -- should we think of your goal is 4x? Or any thoughts on that?

[Avigal Soreq, executive]

Yes, we started -- we are the market that we want to be below 4, and we're eventually going to get there.

[Operator]

There are no further questions at this time. I will turn the call back over to Avigal for closing remarks.

[Avigal Soreq, executive]

Thank you. I would like to thank my colleagues around the table to our Board of Directors, to our investor and mostly to our employees that are making this a great company this, and we'll talk again next quarter. Thank you so much.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. Thank you for joining, and you may now disconnect your lines. Thank you.