8-K: Delek US Holdings Reports Second Quarter 2024 Results with Strategic Shift

Delek US Holdings announced a net loss for the second quarter of 2024, while making significant progress on its 'Sum of the Parts' strategy, including the sale of its retail assets and strategic moves within its logistics segment.

Summary

• Delek US Holdings reported a net loss of $37.2 million, or $(0.58) per share, for the second quarter of 2024.
• Adjusted net loss was $59.3 million, or $(0.92) per share, and adjusted EBITDA was $107.5 million.
• The company made significant progress on its 'Sum of the Parts' strategy, including an agreement to sell its retail assets for $385 million.
• Delek US and Delek Logistics amended and extended intercompany contracts for up to seven years.
• Delek Logistics acquired H2O Midstream and finalized investment in a new gas processing plant.
• A combination of the retail sale, pipeline drop-down, and contract amendments will result in a cash infusion of over $500 million for Delek US.
• Delek Logistics is expected to have two-thirds of its EBITDA from third parties within the next 12 to 18 months.
• The refining segment's adjusted EBITDA was $42.1 million, down from $212.4 million in the same quarter last year, primarily due to lower refining crack spreads.
• The logistics segment's adjusted EBITDA increased to $100.6 million from $90.9 million in the prior year quarter.
• The retail segment's adjusted EBITDA decreased to $12.4 million from $15.0 million in the prior year period.
• Delek US had a cash balance of $657.9 million and total consolidated long-term debt of $2,461.7 million as of June 30, 2024.
• The company paid $16.0 million in dividends and increased the regular quarterly dividend to $0.255 per share in July.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company is making strategic moves to improve its long-term position, the current financial results are weak, with a net loss and significant decline in refining segment performance. The positive strategic actions are balanced by the negative financial results.

Positives

• Delek US successfully progressed its 'Sum of the Parts' strategy, including the sale of retail assets and strategic moves within its logistics segment.
• The sale of retail assets will provide a cash infusion of approximately $385 million.
• The acquisition of H2O Midstream by Delek Logistics is expected to be immediately accretive to EBITDA and free cash flow.
• The new gas processing plant is expected to generate a cash-on-cash return of approximately 20%.
• Delek Logistics is on track to have two-thirds of its EBITDA from third parties within the next 12 to 18 months, increasing its independence.
• The company increased its regular quarterly dividend to $0.255 per share.
• The company achieved its highest throughput quarter in its history.

Negatives

• Delek US reported a net loss of $37.2 million, or $(0.58) per share, for the second quarter of 2024.
• Adjusted net loss was $59.3 million, or $(0.92) per share.
• The refining segment's adjusted EBITDA decreased significantly to $42.1 million, down from $212.4 million in the same quarter last year.
• The retail segment's adjusted EBITDA decreased to $12.4 million from $15.0 million in the prior year period.
• The company recorded restructuring costs totaling $22.6 million associated with its business transformation.
• The company recorded a $22.1 million impairment related to the decision to temporarily idle biodiesel facilities.

Risks

• The company faces risks related to crude oil prices, refining crack spreads, and market conditions.
• There are risks associated with the integration of the Delaware Gathering business by Delek Logistics.
• The company is exposed to risks related to Permian Basin crude oil, including supply, pricing, and transportation capacity.
• There are risks associated with acquisitions and dispositions, including the timing and benefits of the retail and H2O Midstream transactions.
• The company faces potential litigation challenging renewable fuel standard waivers.
• Operating hazards inherent in transporting, storing, and processing crude oil and petroleum products pose a risk.
• The company's performance is subject to general economic and business conditions.

Future Outlook

The company will continue to execute on its priorities of running safe and reliable operations, making further progress on strategic initiatives, and delivering shareholder value while maintaining financial strength and flexibility. Delek Logistics is expected to have two-thirds of its EBITDA from third parties within the next 12 to 18 months.

Management Comments

• We are excited about the significant progress we have made on our 'Sum of the Parts' efforts, said Avigal Soreq, President and Chief Executive Officer of Delek US.
• A combination of our retail sale, drop-down of our interest in the Wink to Webster pipeline, and amendments & extensions of contracts between DK & DKL will allow for a cash infusion of over $500mm in DK with little to no loss in standalone DK EBITDA.
• Looking ahead, we will continue to execute on our priorities of running safe and reliable operations, making further progress on our strategic initiatives, and delivering shareholder value while maintaining our financial strength and flexibility, Soreq concluded.

Industry Context

This announcement reflects a strategic shift in the downstream energy sector, with Delek US focusing on streamlining its operations and unlocking value through asset sales and strategic partnerships. The move towards a more independent Delek Logistics aligns with the trend of midstream companies seeking to diversify their revenue streams and reduce reliance on affiliated entities. The focus on operational efficiency and cost optimization is also a common theme in the industry.

Comparison to Industry Standards

• Delek's refining segment performance is below par compared to peers like Marathon Petroleum (MPC) and Valero Energy (VLO), which have reported stronger refining margins in the same period, although these companies have different geographic footprints and refinery configurations.
• The logistics segment's performance is in line with other midstream companies such as MPLX and Energy Transfer (ET), which have also shown growth in their gathering and processing operations.
• The sale of retail assets is a strategic move similar to what other refiners have done to focus on core operations, such as Phillips 66 (PSX) which has divested some of its retail assets in the past.
• The acquisition of H2O Midstream is a strategic move to increase third-party cash flow, similar to other midstream companies that are expanding their footprint through acquisitions.
• The new gas processing plant is expected to generate a 20% cash-on-cash return, which is a competitive return compared to other midstream projects.

Related Party Transactions

• Delek US and Delek Logistics amended and extended intercompany contracts for a period of up to seven years.
• DK executed a drop-down of Wink to Webster into DKL.

Stakeholder Impact

• Shareholders will be impacted by the net loss and the strategic changes, but also by the increased dividend.
• Employees may be affected by the restructuring and the idling of biodiesel facilities.
• Customers will be impacted by the sale of retail assets and the new fuel supply agreement with FEMSA.
• Suppliers will be impacted by the changes in the company's operations and supply chain.
• Creditors will be impacted by the company's debt levels and financial performance.

Next Steps

• Delek US will continue to execute on its strategic initiatives, including the sale of retail assets and the integration of H2O Midstream.
• Delek Logistics will focus on the development of the new gas processing plant, expected to be online in the first half of 2025.
• The company will continue to focus on running safe and reliable operations and delivering shareholder value.
• The company will hold a conference call to discuss its second quarter 2024 results on August 6, 2024.

Key Dates

Keywords

Delek US Holdings, Refining, Logistics, Midstream, Retail, EBITDA, Net Loss, Dividend, Asset Sale, Acquisition, Pipeline, Gas Processing, Crack Spreads, Permian Basin