8-K: Delek Logistics Reports Record Third Quarter 2024 Results, Driven by Strategic Acquisitions and Operational Growth

Delek Logistics announced record adjusted EBITDA of $106.8 million for the third quarter of 2024, a 9% increase year-over-year, driven by strategic acquisitions and operational growth.

Summary

• Delek Logistics reported a net income attributable to all partners of $33.7 million for the third quarter of 2024.
• The company achieved a record adjusted EBITDA of $106.8 million, which is a 9% increase compared to the same period last year.
• The third quarter results include $8.7 million in transaction costs and impacts from sales-type lease accounting.
• Net cash provided by operating activities was $24.9 million, down from $46.8 million in the third quarter of 2023.
• Distributable cash flow, as adjusted, was $62.0 million, slightly up from $61.4 million in the third quarter of 2023.
• The company's distribution cash flow coverage ratio was 1.1x, below the target of 1.3x, due to timing issues.
• Delek Logistics closed the acquisition of H2O Midstream and completed the acquisition of Delek US' interest in the Wink to Webster pipeline during the quarter.
• They also amended and extended agreements with Delek US for up to seven years and announced a final investment decision on a new gas processing plant.
• A primary offering in October raised $165.3 million to fund growth projects in the Delaware Basin.
• The company increased its distribution to $1.100 per unit, marking the 47th consecutive increase.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with record adjusted EBITDA, strategic acquisitions, and distribution growth. However, there are some concerns about decreased cash flow from operations and a lower than target distribution coverage ratio, which temper the overall sentiment.

Positives

• Adjusted EBITDA increased by $8.6 million year-over-year, driven by higher contributions from the Midland Gathering systems, terminalling and marketing rate increases, and the W2W dropdown.
• The Gathering and Processing segment saw an increase in adjusted EBITDA due to higher throughput from Permian Basin assets and the H2O Midstream acquisition.
• The Storage and Transportation segment's adjusted EBITDA increased due to higher storage and transportation rates.
• The company has a strong borrowing capacity with $695.1 million available under its revolving credit facility.
• The company continues to demonstrate a commitment to distribution growth with a 5.3% increase over the third quarter of 2023.

Negatives

• Net income attributable to limited partners decreased slightly to $33.7 million from $34.8 million in the third quarter of 2023.
• Net cash provided by operating activities decreased to $24.9 million from $46.8 million in the third quarter of 2023.
• The distribution cash flow coverage ratio was 1.1x, below the target of 1.3x, due to timing issues.
• The Wholesale Marketing and Terminalling segment experienced a decrease in adjusted EBITDA due to a decline in wholesale margins.
• EBITDA was $69.2 million compared to $98.2 million in the third quarter 2023, however this was impacted by $8.7 million of transaction costs and impacts of sales-type lease accounting.

Risks

• A significant portion of Delek Logistics' revenue is derived from Delek US, subjecting it to Delek US' business risks.
• There are risks related to the age and operational hazards of the company's 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 the benefits of the H2O Midstream transaction and its integration.
• Future decisions by OPEC regarding production and pricing could impact the company.
• The company's growth is dependent on Delek US' ability to grow as expected.
• Changes in laws, including tax and regulatory matters, could adversely affect the company.

Future Outlook

Delek Logistics expects to continue to increase its distribution in the future and will continue to strengthen and grow through prudent management of liquidity and leverage. The company anticipates additional growth opportunities in the Delaware Basin.

Management Comments

• Avigal Soreq, President of Delek Logistics' general partner, stated that the company continues to provide the best combination of yield and growth in the midstream sector.
• Mr. Soreq also mentioned that the recent equity offering allows the company to bring forward additional growth opportunities and strengthen its position in the Delaware basin.
• Mr. Soreq noted that the company will continue to strengthen and grow DKL through a prudent management of liquidity and leverage.

Industry Context

This announcement highlights Delek Logistics' strategic focus on expanding its midstream operations in the Permian Basin, a key growth area in the energy sector. The acquisitions and investments position the company as a major player in the region, aligning with the industry trend of consolidation and expansion in key production areas.

Comparison to Industry Standards

• Delek Logistics' adjusted EBITDA growth of 9% year-over-year is a strong performance compared to some midstream peers, although specific comparisons would require a broader analysis of the sector.
• The distribution increase of 5.3% year-over-year demonstrates a commitment to returning value to unitholders, which is a key metric for master limited partnerships (MLPs).
• The leverage ratio of 4.15x is within a reasonable range for midstream companies, but it is important to monitor this metric in the context of future growth plans.
• Companies such as Enterprise Products Partners (EPD) and Magellan Midstream Partners (MMP) are often used as benchmarks in the midstream sector, and a detailed comparison of their financial metrics would provide further context.

Related Party Transactions

• Delek US Holdings, Inc. owns the general partner interest as well as a majority limited partner interest in Delek Logistics, and is also a significant customer.
• Delek Logistics and Delek US renewed and amended certain commercial agreements, which resulted in sales-type lease accounting.

Stakeholder Impact

• Shareholders will benefit from the increased distribution and potential for future growth.
• Employees may see opportunities for advancement due to the company's expansion.
• Customers will benefit from the expanded service offerings and infrastructure.
• Suppliers may see increased demand for their products and services.
• Creditors will be interested in the company's strong borrowing capacity and leverage ratio.

Next Steps

• Delek Logistics will continue to integrate the recently acquired assets.
• The company will proceed with the construction of the new gas processing plant.
• They will focus on further growth opportunities in the Delaware Basin.
• The company will continue to manage liquidity and leverage prudently.

Key Dates

Keywords

Midstream, Logistics, EBITDA, Distribution, Permian Basin, Acquisition, Pipeline, Gathering, Processing, Crude Oil, Natural Gas, H2O Midstream, Wink to Webster, Delaware Basin