10-Q: Delek Logistics Partners Reports Increased Net Income and EBITDA in Q2 2024 Amid Strategic Growth Initiatives

Delek Logistics Partners, LP (DKL) announced improved financial results for the second quarter of 2024, driven by strong performance across all operating segments and strategic acquisitions.

Summary

• Delek Logistics Partners, LP (DKL) reported a net income of $41.1 million for the three months ended June 30, 2024, compared to $32.2 million for the same period in 2023.
• The company's EBITDA increased to $102.4 million in Q2 2024, up from $92.8 million in Q2 2023.
• For the six months ended June 30, 2024, net income attributable to partners was $73.7 million, compared to $69.3 million for the same period in 2023.
• The company's EBITDA for the six months ended June 30, 2024, increased to $203.9 million, up from $185.9 million in the same period of 2023.
• DKL's revenue increased by 7.2% in Q2 2024 compared to Q2 2023, primarily due to increased volumes in West Texas marketing operations and higher terminalling and marketing revenue.
• The company completed a public offering of common units, selling 3,584,416 units at $38.50 per unit, generating net proceeds of $132.2 million.
• DKL entered into an agreement to acquire H2O Midstream for $230 million, expected to close by the end of 2024.
• DKL acquired a 50% investment in W2W Holdings LLC, which includes a 15.6% indirect interest in the Wink to Webster Pipeline, for $86.6 million in cash, forgiveness of a $60 million receivable from Delek Holdings and 2,300,000 common units.
• DKL amended and extended commercial agreements with Delek Holdings for five to seven years, with an option to extend for an additional five years.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong financial results, strategic acquisitions, and expansion plans. While there are some challenges and risks, the overall tone is optimistic and suggests a company on a growth trajectory.

Positives

• The company experienced strong financial and operational performance across all operating segments.
• The gathering and processing segment saw a $4.3 million increase in segment EBITDA.
• The wholesale marketing and terminalling segment saw a $5.5 million increase in segment EBITDA.
• The storage and transportation segment saw a $6.5 million increase in segment EBITDA.
• Segment EBITDA for investments in pipeline joint ventures increased by $2.8 million.
• The company has built-in recessionary protections, including minimum volume commitments and dedicated acreage agreements.
• The company is well-positioned to manage through an economic downturn.
• The company is expanding its third-party revenue through the new natural gas processing plant.

Negatives

• RINs revenue decreased from $3.2 million in Q2 2023 to $1.3 million in Q2 2024, due to a decrease in RINs prices.
• The average sales prices per gallon of gasoline and diesel sold decreased by $0.14 and $0.06 per gallon, respectively, in Q2 2024 compared to Q2 2023.
• The average cost per gallon of gasoline sold decreased by $0.14 per gallon, partially offset by an increase in average cost per gallon of diesel sold of $0.03 per gallon in Q2 2024 compared to Q2 2023.
• Operating expenses increased by $7.8 million, or 14.6%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily driven by an increase in contract services.
• Interest expense increased by $7.8 million, or 11.5%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily driven by debt extinguishment costs and interest associated with the 2029 Notes.

Risks

• The company is substantially dependent on Delek Holdings and its ability to pay under commercial agreements.
• The company is exposed to risks related to commodity prices and demand for refined products.
• The company is subject to operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products.
• The company is subject to changes in insurance markets impacting costs and the level and types of coverage available.
• The company is subject to disruptions due to equipment interruption or failure, or other events, including terrorism, sabotage or cyber-attacks.
• The company is subject to changes in the availability and cost of capital of debt and equity financing.
• The company is subject to changes in general economic conditions, including uncertainty regarding the timing, pace and extent of economic recovery in the United States due to governmental fiscal policy or a public health crisis.
• The company is subject to significant operational, investment or other changes required by existing or future environmental statutes and regulations.
• The company is subject to competitive conditions in the industry including capacity overbuild in areas where it operates.
• The company is subject to future decisions by OPEC+ regarding production and pricing and disputes between OPEC+ regarding such.
• The company is subject to changes or volatility in interest and inflation rates.
• The company is subject to large customer defaults.
• The company is subject to changes in tax status and regulations.
• The company is subject to the effects of future litigation or environmental liabilities that are not covered by insurance.
• The company may be unsuccessful in integrating the operations of the assets it has acquired or may acquire with its operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.

Future Outlook

The company expects that liquid transportation fuels will continue to be in high demand, and it expects to continue to leverage the strength of its cash flows and balance sheet in order to continue maximizing unitholder returns and the long-term prospects for return on investment. The company also expects to continue to position itself as a premier, full-service midstream provider in the Permian Basin.

Management Comments

• Management believes that the company is 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.
• Management expects that renewables, other than hydrocarbons, will continue to grow as a percentage of total energy consumption; however, a material reduction in the reliance on oil and gas for energy consumption is unlikely in the near term.
• Management believes that the company continues to be strategically positioned, even in tougher market conditions, to sustain positive operating results and cash flows and to continue developing profitable growth projects that are needed to support future distribution growth.

Industry Context

The company's performance is influenced by fluctuations in crude oil, natural gas, and NGL prices, as well as the demand for refined products. The company's expansion of gas processing capabilities and dedicated acreage agreements are strategic moves to diversify its customer base and service offerings, and to capitalize on growth opportunities in strong economic conditions.

Comparison to Industry Standards

• The company's performance is compared to other publicly traded partnerships in the midstream energy industry.
• The company's EBITDA is used as a measure to evaluate its financial performance compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods.
• The company's distributable cash flow is used as a measure to assess its ability to generate cash and make distributions to its unitholders.

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, resulting in the Partnership recovering $8.3 million in condemnation proceeds.

Related Party Transactions

• The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings under which it provides various services.
• The Partnership entered into an omnibus agreement with Delek Holdings, its general partner, and certain of the Partnerships and Delek Holdings other subsidiaries.
• The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement.
• The Partnership and certain of its subsidiaries entered into the Related Party Revolving Credit Facility with Delek Holdings.
• The Partnership amended and extended commercial agreements with subsidiaries of Delek Holdings under which it provides various services.
• The Partnership entered into an assignment agreement with Delek Holdings to assign the Big Spring Refinery Marketing Agreement to Delek Holdings.
• The Partnership entered into an amended and restated Omnibus Agreement with Delek Holdings that provides Delek Holdings an option to purchase certain critical assets from the Partnership at market value during the period beginning upon any change in control or sale of substantially all assets involving the Partnership.

Stakeholder Impact

• Shareholders will benefit from the increased net income, EBITDA, and cash distributions.
• Employees may benefit from the company's growth and expansion.
• Customers will benefit from the company's enhanced service offerings and expanded network.
• Suppliers may benefit from increased business opportunities with the company.
• Creditors may benefit from the company's improved financial performance and reduced debt.

Next Steps

• The company anticipates closing the H2O Midstream acquisition by the end of 2024.
• The company will continue to evaluate and pursue opportunities to grow its business through both strategic acquisitions and expansion and construction projects.
• The company will continue to focus on leveraging and, when appropriate, expanding its investments in joint ventures.
• The company will continue to evaluate potential opportunities to make capital investments that will be used to expand its existing asset base through the expansion and construction of new logistics assets to support growth of any of its customers' businesses and from increased third-party activity.
• The company will continue seeking to enhance the profitability of its existing assets by adding incremental throughput volumes, improving operating efficiencies and increasing system-wide utilization.
• The company will continue to seek opportunities to further diversify its customer base by increasing third-party throughput volumes running through certain of its existing systems and expanding its existing asset portfolio to service more third-party customers.
• The company will continue to look for ways to grow its business whilst staying conscious of and minimizing the negative environmental impact, while also seeking opportunities to invest in innovative technologies that will reduce its carbon emissions as it achieves its growth objectives and sustainably improve unitholder returns.

Key Dates

Keywords

Midstream, Logistics, Crude Oil, Natural Gas, Pipelines, Terminals, Storage, EBITDA, Gathering, Processing, Transportation, Wholesale Marketing, Permian Basin, Joint Ventures, Water Disposal, Recycling