10-Q: Delek Logistics Partners Amends Throughput Agreement, Announces Asset Purchase and Strategic Shift

Delek Logistics Partners, LP announces an amended throughput agreement, asset purchase, and strategic shift towards greater economic separation from Delek US Holdings.

Summary

• Delek Logistics Partners, LP (DKL) has amended its throughput agreement with Delek US Holdings (Delek) for the El Dorado rail facility, including a minimum volume commitment for refined products.
• DKL will sell the El Dorado rail facility assets to Delek for $25.0 million, expected to close on January 1, 2026.
• DKL will assume Delek's rights and obligations to purchase crude oil under certain contracts associated with DKL's existing Midland Gathering System.
• DKL and Delek have agreed to terminate the East Texas Marketing Agreement effective January 1, 2026.
• DKL has entered into an amended and restated Omnibus Agreement with Delek, increasing the administrative fee phased in over two years starting July 1, 2025.
• DKL repurchased 243,075 common units from Delek for $10.0 million during the quarter ended March 31, 2025, with $140.0 million remaining authorized for repurchases.
• DKL completed the Gravity Acquisition on January 2, 2025, for $300.8 million, including $209.3 million in cash and 2,175,209 common units.
• DKL's net income for the three months ended March 31, 2025, was $39.034 million, or $0.73 per unit.
• DKL's EBITDA for the three months ended March 31, 2025, was $85.486 million.
• DKL's capital spending for the three months ended March 31, 2025, was $71.943 million.
• DKL declared a quarterly cash distribution of $1.110 per unit, payable on May 15, 2025.

Sentiment

Score: 7

Explanation: The sentiment is neutral to positive. While EBITDA is down, net income is up and the company is making strategic moves to increase independence and expand its operations. The unit repurchase program and distribution increase also signal confidence.

Positives

• DKL is strategically shifting towards greater economic separation from Delek US Holdings.
• DKL is expanding its presence in the Permian Basin through the Gravity Acquisition and assuming Delek's crude oil purchase obligations.
• DKL is maintaining a strong distribution growth profile with a quarterly cash distribution of $1.110 per unit.
• DKL has authorization to repurchase additional common units, indicating confidence in its financial position.

Negatives

• DKL's EBITDA decreased by $16.0 million in the first quarter of 2025 compared to the first quarter of 2024.
• DKL is reliant on Delek US Holdings for a significant portion of its revenue and operations.

Risks

• DKL's performance is sensitive to changes in commodity prices and demand for refined products.
• DKL's ability to satisfy working capital requirements and pay distributions depends on future operating performance, which is subject to economic conditions and other factors beyond its control.
• DKL's credit ratings may be affected by Delek US Holdings' level of indebtedness and financial performance.
• DKL faces risks related to environmental and safety regulations, potential litigation, and operational disruptions.

Future Outlook

The Partnership is focused on growing its asset base through accretive growth opportunities, supplementing organic growth with bolt-on acquisitions, and increasing third-party cash flows to enhance economic separation from its sponsor.

Industry Context

The announcement reflects a trend in the midstream energy sector towards optimizing asset portfolios and increasing focus on core operations. The strategic shift towards greater economic separation from Delek US Holdings aligns with broader industry efforts to enhance independence and attract a wider investor base.

Comparison to Industry Standards

• The sale of the El Dorado rail facility for $25 million is within the typical range for similar midstream asset sales, but the specific value depends on factors such as throughput volume, contract terms, and location.
• The increase in the administrative fee under the amended Omnibus Agreement is a common practice in master limited partnerships (MLPs) to compensate the general partner for services provided.
• The unit repurchase program is a common strategy used by MLPs to return capital to unitholders and support the unit price.
• The Gravity Acquisition is consistent with the industry trend of consolidation and expansion in the water midstream sector, driven by increasing produced water volumes in the Permian Basin.
• Comparable companies in the midstream sector, such as MPLX, Enterprise Products Partners, and Plains All American Pipeline, also engage in asset sales, acquisitions, and capital return programs to optimize their portfolios and enhance shareholder value.

Management Changes

Corporate Governance

Legal Proceedings

• The Partnership was involved in litigation with the State of Texas Department of Transportation, which was settled in the second quarter of 2024 and resulted in the Partnership recovering $8.3 million in condemnation proceeds. In the first quarter of 2025, we recovered additional $4.3 million related to this settlement.

Related Party Transactions

• The document details numerous related party transactions with Delek US Holdings, including commercial agreements, reimbursements, and the transfer of assets.
• The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement (the 'DPG Management Agreement') for the construction of gathering systems in the Permian Basin.

Stakeholder Impact

• Shareholders: The strategic shift and capital allocation decisions aim to enhance long-term value and returns.
• Employees: The organizational changes and strategic initiatives may impact employee roles and responsibilities.
• Customers: The focus on expanding services and diversifying the customer base may lead to improved service offerings.
• Suppliers: The asset sales and acquisitions may impact relationships with suppliers.
• Creditors: The debt levels and financial performance will influence credit ratings and borrowing costs.

Next Steps

• Complete the sale of the El Dorado rail facility assets to Delek US Holdings, expected to close on January 1, 2026.
• Continue to integrate the Gravity Acquisition and realize synergies.
• Continue to execute the unit repurchase program.
• Monitor and manage the impact of commodity price fluctuations and economic conditions on operations.

Key Dates

Keywords

Delek Logistics Partners, Delek US Holdings, throughput agreement, asset purchase, economic separation, Gravity Acquisition, unit repurchase, EBITDA, cash distribution, Permian Basin, midstream, crude oil, refined products, pipeline