8-K: Delek Logistics Reports Mixed Q4 2023 Results Amidst Growth and Impairment

Delek Logistics reported a decrease in net income for Q4 2023, despite increased adjusted EBITDA and distribution growth, due to higher interest expenses and a goodwill impairment.

Summary

• Delek Logistics Partners, LP announced its financial results for the fourth quarter of 2023, reporting a net income of $22.1 million, or $0.51 per diluted unit, a decrease from $42.7 million in Q4 2022.
• The decrease in net income was primarily due to higher interest expenses and a $14.8 million goodwill impairment related to the Delaware Gathering reporting unit.
• Despite the net income decrease, adjusted EBITDA increased to $100.9 million, up from $92.5 million in Q4 2022, driven by higher contributions from the Midland and Delaware Gathering systems, terminalling and marketing rate increases, and strong throughput on joint venture pipelines.
• Distributable cash flow was $64.6 million, resulting in a DCF coverage ratio of 1.40x, and the company declared a quarterly cash distribution of $1.055 per unit, marking the 44th consecutive increase.
• For the full year 2023, net income was $126.2 million, with an adjusted EBITDA of $385.1 million and distributable cash flow of $248.2 million, resulting in a DCF coverage ratio of 1.37x.
• The company's leverage ratio improved to 4.34x from 4.89x at the end of 2022, and Midland gathering and processing volumes grew nearly 80% in 2023.
• The 2024 capital expenditure program is estimated at $70 million, with $20 million allocated for sustaining and regulatory projects and $50 million for growth projects.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the increase in adjusted EBITDA, distribution growth, and strong operational performance in the Midland basin. However, the decrease in net income and the goodwill impairment temper the overall positive outlook.

Positives

• Adjusted EBITDA increased to $100.9 million in Q4 2023, up from $92.5 million in Q4 2022.
• The company achieved a distributable cash flow coverage ratio of 1.40x in Q4 2023.
• Delek Logistics has delivered 44 consecutive quarters of distribution growth, with the latest increase to $1.055 per unit.
• The leverage ratio improved to 4.34x at the end of 2023, down from 4.89x at the end of 2022.
• Midland gathering and processing volumes grew nearly 80% in 2023.
• The company has a strong track record of delivering value to unitholders.

Negatives

• Net income attributable to all partners decreased to $22.1 million in Q4 2023, compared to $42.7 million in Q4 2022.
• The decrease in net income was driven by higher interest expenses and a $14.8 million goodwill impairment.
• The company recorded a $14.8 million impairment charge related to the Delaware Gathering reporting unit.
• Corporate Adjusted EBITDA was a loss of $6.9 million in Q4 2023, compared to a loss of $4.0 million in Q4 2022.

Risks

• A significant portion of Delek Logistics' revenue is derived from Delek US, subjecting it to Delek US' business risks.
• The company faces risks related to the age and operational hazards of its assets, including potential spills and other hazards.
• Adverse market conditions could affect the utilization of Delek Logistics' assets and business performance.
• There are uncertainties regarding future decisions by OPEC regarding production and pricing.
• The company's future growth opportunities are dependent on Delek US' ability to grow as expected.
• Changes in laws, including tax and regulatory matters, could negatively impact the company.

Future Outlook

Delek Logistics expects to utilize capital investments in 2024 to support customer growth and expand upon existing assets, with a focus on new connections in the Midland and Delaware gathering systems. The company feels confident in its ability to maintain competitive distributions to investors as it heads into 2024.

Management Comments

• Avigal Soreq, President of Delek Logistics' general partner, stated that Delek Logistics exceeded quarterly earnings goals and surpassed last year's strong performance.
• Mr. Soreq highlighted the substantial growth from new connections in the Midland gathering operations.
• Mr. Soreq expressed confidence in the company's ability to maintain competitive distributions to investors in 2024.

Industry Context

This announcement reflects the ongoing activity in the midstream energy sector, particularly in the Permian Basin, where Delek Logistics has significant operations. The company's focus on growth in gathering and processing aligns with the industry's need for infrastructure to support increased production. The impairment charge highlights the impact of rising interest rates on asset valuations in the sector.

Comparison to Industry Standards

• Delek Logistics' adjusted EBITDA of $100.9 million for Q4 2023 is comparable to other midstream companies of similar size, such as MPLX which reported $1.5 billion in adjusted EBITDA for the same quarter, however MPLX is a much larger company.
• The DCF coverage ratio of 1.40x is within the range of other midstream MLPs, indicating a healthy ability to cover distributions.
• The 80% growth in Midland gathering volumes is a strong performance compared to industry averages, which are typically in the single to low double-digit range.
• The leverage ratio of 4.34x is within the acceptable range for midstream companies, although some peers may have lower leverage ratios.
• The $70 million capital program for 2024 is a moderate level of investment compared to larger peers, reflecting Delek Logistics' focus on organic growth and targeted expansions.

Stakeholder Impact

• Shareholders will benefit from the continued distribution growth and the company's focus on delivering value.
• Employees are recognized for their dedication to safe and reliable operations.
• Customers will benefit from the company's capital investments to support growth and expand existing assets.
• Creditors will be reassured by the improved leverage ratio and the company's ability to service debt.

Next Steps

• Delek Logistics will hold a conference call to discuss its fourth quarter 2023 results on February 27, 2024.
• The company will focus on advancing new connections in both the Midland and Delaware gathering systems in 2024.
• The company will continue to evaluate growth opportunities and potential dropdowns.

Key Dates

Keywords

Delek Logistics, Midstream Energy, EBITDA, Distributable Cash Flow, Gathering and Processing, Permian Basin, Capital Program, Distribution, Goodwill Impairment, Leverage Ratio