10-Q: Delek Logistics Boosts Permian Presence, Hikes Payout

Delek Logistics Partners reports increased net income and distributable cash flow, driven by strategic acquisitions and enhanced liquidity, despite revenue reclassifications.

Summary

• Net income increased by 13.4% to $83.608 million for the six months ended June 30, 2025, compared to $73.706 million in the prior year.
• Distributable cash flow rose by 4.4% to $141.743 million for the six months ended June 30, 2025, up from $135.800 million.
• EBITDA decreased by 13.9% to $175.575 million for the six months ended June 30, 2025, primarily due to the reclassification of certain commercial agreements as sales-type leases.
• Completed the Gravity Acquisition on January 2, 2025, for $300.8 million, adding water disposal and recycling operations in the Permian and Bakken basins.
• The H2O Midstream Acquisition (completed Sept 2024) and Gravity Acquisition contributed $31.8 million and $46.8 million in revenue, respectively, for the six months ended June 30, 2025.
• Issued $700.0 million in 7.375% senior notes due 2033, using proceeds to reduce outstanding borrowings on the DKL Revolving Facility.
• Declared a quarterly cash distribution of $1.115 per unit, a 2.3% increase over the second quarter 2024 distribution.
• Repurchased 243,075 common units from Delek Holdings for $10.0 million, with $140.0 million remaining under the authorization.
• Total liquidity stood at $1,070.6 million as of June 30, 2025, including $1,069.2 million in unused credit commitments.

Sentiment

Score: 8

Explanation: The filing indicates strong strategic execution with significant acquisitions contributing to growth and diversification. While overall revenue and EBITDA show a decline, this is largely due to an accounting reclassification rather than operational weakness. Net income and distributable cash flow increased, and the company enhanced its liquidity and increased distributions, signaling financial health and confidence in future prospects.

Positives

• Net income increased by 13.4% year-over-year, reaching $83.608 million for the first six months of 2025.
• Distributable cash flow grew by 4.4% to $141.743 million, indicating strong cash generation.
• Successful integration of Gravity and H2O Midstream acquisitions significantly boosted Gathering and Processing segment EBITDA by 17.3% ($19.4 million increase).
• Income from equity method investments increased by 26.3% ($4.3 million) due to the acquisition of the Wink to Webster (W2W) Investment.
• Enhanced liquidity to over $1.0 billion following the successful issuance of $700.0 million in 2033 Notes and repayment of revolving facility debt.
• Increased quarterly cash distribution to $1.115 per unit, representing a 2.3% increase over the prior year's comparable quarter.
• Initiated a common unit repurchase program, buying back $10.0 million in units from Delek Holdings, demonstrating commitment to unitholder returns.
• Expansion of the Libby natural gas processing plant is in its initial phase, expected to reach full capacity by late 2025, promising future growth.
• Strategic moves to increase third-party revenue streams and diversify the customer base, enhancing economic separation from Delek Holdings.
• Maintained compliance with all debt covenants as of June 30, 2025.

Negatives

• Overall net revenues decreased by 4.0% to $496.280 million for the six months ended June 30, 2025, primarily due to accounting reclassification of certain throughput fees to interest income under sales-type leases.
• EBITDA decreased by 13.9% to $175.575 million, largely attributable to the reclassification of certain commercial agreements as sales-type leases.
• Wholesale Marketing and Terminalling segment EBITDA decreased by 42.0% ($23.3 million) due to sales-type lease accounting and the assignment of the Big Spring refinery marketing agreement.
• Storage and Transportation segment EBITDA decreased by 67.2% ($23.4 million) also due to sales-type lease accounting.
• Basic and diluted net income per unit decreased from $1.61 to $1.56 for the six months ended June 30, 2025.
• Increased operating expenses by 28.5% and general and administrative expenses by 63.7% for the six months ended June 30, 2025, largely due to acquisition and integration costs.
• Cash and cash equivalents decreased from $5,384 million at December 31, 2024, to $1,436 million at June 30, 2025.

Risks

• Substantial dependence on Delek Holdings and its assignees, and their ability to pay under commercial agreements.
• Potential for suspension, reduction, or termination of Delek Holdings' or third-party obligations under commercial agreements.
• Exposure to market risks related to volatility of commodity and refined product prices in West Texas operations.
• Uncertainty in the near-term economic outlook due to widespread tariffs, geopolitical instability, and commodity market volatility.
• Potential for sustained depressed demand/prices to curb exploration and production expansion opportunities or impact customers' willingness/ability to renew commercial agreements.
• Disruptions due to equipment interruption or failure, or other events (terrorism, sabotage, cyber-attacks) at facilities.
• Changes in the availability and cost of debt and equity financing.
• Reliance on information technology systems in day-to-day operations.
• Effects of existing and future laws and governmental regulations, including environmental protection, pipeline integrity, and safety.
• Competitive conditions in the industry, including capacity overbuild in operating areas.
• Inability to complete growth projects on time and on budget.
• Risks associated with integrating acquired businesses and achieving anticipated benefits.
• Potential for future litigation or environmental liabilities not covered by insurance.
• Fluctuations in interest and inflation rates.

Future Outlook

The Partnership expects to reach full capacity at its Libby natural gas processing plant expansion by the latter half of 2025. It anticipates continued high demand for liquid transportation fuels and plans to leverage strong cash flows and balance sheet for organic growth and bolt-on acquisitions. The company is strategically positioned to sustain positive operating results and cash flows even in tougher market conditions due to built-in recessionary protections like minimum volume commitments and dedicated acreage agreements. Contractual rate adjustments effective July 1, 2025, including FERC-indexed tariffs and CPI/PPI adjustments, are expected to reflect current market conditions.

Management Comments

• Made significant strides in our commitment to being a full-suite crude, gas and water midstream services provider in the Permian Basin, in addition to diversifying our customer base to include more third-party customers.
• These transactions significantly enhance our competitive position in the Midland basin and serve to further our economic separation from our sponsor and contribute to an increase in third party revenue.
• As producers continue to ramp up production within the Permian Basin, the Partnership is well positioned to continue to add value through our gathering and processing services as we have expanded our dedicated crude acreage in our Midland Gathering system.
• Currently, the gas plant is in its initial phase of operation, and we foresee it reaching full capacity by the latter half of 2025.
• Our disciplined approach to cost control, coupled with a focus on margin enhancements, supported earnings before interest, taxes, depreciation and amortization ('EBITDA') growth and improved cash flow, while our capital deployment remained aligned with our strategic priorities.
• This strengthened financial position empowers us to advance our strategy of organic growth while also exploring attractive opportunities for bolt-on acquisitions.
• Our positioning allows our customers the ability to control quality and adds optionality to place barrels in a variety of markets.
• We are well positioned to manage through an economic downturn because of built-in recessionary protections which include minimum volume commitments on throughput and dedicated acreage agreements.
• We expect that liquid transportation fuels will continue to be in high demand, and we expect to continue to leverage the strength of our cash flows and balance sheet in order to continue maximizing unitholder returns and the long-term prospects for return on investment.
• These actions not only enhance our standing in the market but also move to align us as an independent, largely third-party cash flow company with a robust growth profile.
• The Partnership prioritizes safe and reliable operation of its assets to maintain financial stability and growth. We have successfully avoided lost time injuries for four years, demonstrating our strong safety protocols and adherence to regulations.
• By reducing our leverage and maintaining a strong financial position, we are better equipped to navigate challenges that may arise. This financial stability also allows us to seize emerging opportunities that align with our strategic goals, ensuring that we can continue to deliver value to our unitholders.

Industry Context

The company operates in the midstream energy sector, which is sensitive to fluctuations in crude oil, natural gas, and NGL prices. Its strategic focus on the Permian Basin aligns with ongoing producer activity and production ramp-up in the region. The acquisitions of Gravity and H2O Midstream position the company as a full-suite crude, gas, and water midstream services provider, diversifying its customer base beyond its affiliate, Delek Holdings. The industry is seeing a shift towards alternative energy sources, but the company anticipates continued high demand for liquid transportation fuels in the near term. The company's long-term fee-based contracts with minimum volume commitments provide resilience against short-term price and demand volatility, a key characteristic for stable midstream operations.

Comparison to Industry Standards

• The company's strategy to increase third-party revenue and diversify its customer base aligns with broader midstream industry trends seeking to reduce reliance on single anchor tenants and enhance stability.
• The acquisition of water disposal and recycling operations (Gravity and H2O Midstream) positions the company to offer integrated crude and water services, a growing trend in basins like the Permian where water management is critical for producers.
• The expansion of natural gas processing capabilities in the Delaware Basin, including AGI and sour gas processing, reflects an industry-wide move to capture value from associated gas production in prolific unconventional plays.
• The company's use of long-term, fee-based contracts with minimum volume commitments is a standard industry practice for midstream companies to mitigate commodity price risk and ensure stable cash flows, comparable to models used by larger players like Plains All American Pipeline, L.P. (PAGP) and MPLX LP (MPLX).
• The unit repurchase program is a common capital allocation strategy employed by mature midstream companies to return value to unitholders, similar to programs seen across the MLP sector.

Corporate Governance

Legal Proceedings

• In the ordinary course of business, the company is subject to lawsuits, investigations, and claims, including environmental and employee-related matters, which are not expected to have a material adverse effect on financial statements.
• Recovered an additional $4.3 million in the first half of 2025 related to the Texas Department of Transportation settlement.
• Subject to extensive federal, state, and local environmental and safety laws and regulations, with ongoing discussions with authorities and potential for future capital investments for compliance.
• Releases of hydrocarbons or hazardous substances could lead to substantial expenses if not insured or reimbursed under the Omnibus Agreement.

Related Party Transactions

• Long-term, fee-based commercial agreements with Delek Holdings for crude oil gathering, transportation, storage, wholesale marketing, and terminalling services.
• Omnibus Agreement with Delek Holdings governs operational services, reimbursement obligations, and an annual fee of $4.4 million for centralized corporate services; amended May 1, 2025, to increase administrative fee and include change of control transition service obligations.
• DPG Management Agreement: Partnership manages long-term capital projects on behalf of Delek Holdings, receiving monthly operating and construction services fees ($0.5 million for six months ended June 30, 2025).
• Delek Permian Gathering (DPG) Dropdown: On May 1, 2025, Delek Holdings transferred purchasing and blending activities to the Partnership, including cancellation of $58.8 million in existing receivables owed by Delek Holdings.
• East Texas Marketing Agreement: Terminated effective January 1, 2026.
• El Dorado Rail Facility: Amended throughput agreement with Delek Holdings (minimum volume commitment) and an asset purchase agreement for Delek Holdings to buy the facility for $25.0 million, closing January 1, 2026.
• Purchases of refined products and bulk biofuels from Delek Holdings are included in cost of materials and other-affiliate.
• Cash distributions to Delek Holdings: $75.287 million for the six months ended June 30, 2025.
• Repurchased 243,075 common units from Delek Holdings for $10.0 million.

Stakeholder Impact

• Shareholders/Unitholders: Positive impact from increased quarterly distributions ($1.115 per unit), common unit repurchase program ($10.0 million), and strategic acquisitions aimed at long-term growth and diversification.
• Employees: No direct impact mentioned, but the company emphasizes safe operations and has avoided lost time injuries for four years.
• Customers: Diversification of customer base to include more third-party customers, especially in the Permian Basin, offers broader service offerings (crude, gas, water). Long-term fee-based contracts with minimum volume commitments provide stability.
• Creditors: Positive impact from successful debt issuance ($700.0 million 2033 Notes) used to reduce revolving facility debt, and compliance with all debt covenants, indicating strong financial management.

Next Steps

• Natural gas processing plant expansion in the Delaware Basin is expected to reach full capacity by the latter half of 2025.
• Administrative Fee increase under the Omnibus Agreement will be phased in over two years, beginning July 1, 2025.
• East Texas Marketing Agreement will terminate effective January 1, 2026.
• Delek Holdings will purchase the El Dorado rail facility assets from the Partnership for $25.0 million, with closing set for January 1, 2026.
• Continue to evaluate and pursue attractive organic growth opportunities and bolt-on acquisitions.
• Continue to optimize existing assets and expand the customer base by adding incremental throughput volumes and increasing third-party volumes.
• Continue efforts to expand ESG consciousness and lower the carbon footprint through ESG-conscious investments.
• Continue to monitor market conditions, financial position, and credit ratings for future funding sources.

Key Dates

Recommendation

Delek Logistics Partners demonstrates robust strategic execution, particularly through its accretive acquisitions of Gravity and H2O Midstream, which are significantly expanding its Permian Basin footprint and diversifying its revenue streams towards third-party customers. While reported EBITDA saw a decline, this was primarily an accounting reclassification to sales-type leases, not an operational setback, as evidenced by the increase in net income and distributable cash flow. The company's proactive debt management, including a successful $700 million note issuance, has bolstered liquidity to over $1 billion, providing ample financial flexibility for future growth. The increase in quarterly distributions and the ongoing unit repurchase program underscore management's confidence and commitment to enhancing unitholder value. The company's strong contractual protections (MVCs) and focus on operational efficiency position it well to navigate market uncertainties and deliver sustainable long-term returns.

Keywords

Midstream, Oil and Gas, Permian Basin, Logistics, Pipeline, Gathering and Processing, Wholesale Marketing, Terminalling, Storage, Transportation, Water Disposal, Energy Infrastructure, SEC Filing, Quarterly Report, DKL