Delek Logistics Partners (NYSE:DKL), a full-service provider of midstream services in the Permian Basin, announced record second-quarter earnings with an adjusted EBITDA of $102.4 million. The company highlighted several strategic transactions poised to enhance its market position, including an extended contract with DK and the Wink to Webster pipeline, an investment in a new gas processing plant, and the acquisition of H2O Midstream. The Board of Directors approved an increase in the quarterly distribution to $1.09 per unit, reflecting the company's strong performance and commitment to delivering value to its unitholders.
Key Takeaways
- Delek Logistics Partners reported a record quarterly adjusted EBITDA of $102.4 million.
- The company announced significant transactions, including a contract extension with DK, an investment in a new gas processing plant, and the acquisition of H2O Midstream.
- These strategic moves are expected to strengthen DKL's position in the Permian Basin and enhance asset quality.
- The Board of Directors approved an increase in the quarterly distribution to $1.09 per unit.
- The company's leverage improved, with a ratio of 3.81 times at the end of Q2 2024, down from 4.84 at the end of 2022.
Company Outlook
- DKL's majority EBITDA is projected to come from non-related parties by the first half of 2025, making it a mostly independent midstream company.
- The new gas processing plant is highly subscribed and is expected to generate cash on cash returns of more than 20%, with completion targeted for the first half of 2025.
Bearish Highlights
- The company did not highlight any specific bearish trends during the call.
Bullish Highlights
- DKL's strategic transactions are expected to be immediately accretive to EBITDA and free cash flow.
- The acquisition of H2O Midstream for $160 million cash and $70 million preferred is seen as a synergistic fit within DKL's existing footprint.
Misses
- There were no specific misses mentioned in the earnings call.
Q&A Highlights
- Avigal Soreq, President of DKL, discussed the comprehensive suite of services that will improve future customer opportunities and operational efficiency.
- The new Delaware gas plant is already highly subscribed, indicating strong demand that aligns with the company's growth strategy.
- The $55 million to $85 million EBITDA range for the announced transactions is based on assumptions that include base business performance rather than solely on synergies.
- Funding for the transactions will be managed efficiently, with a tax-efficient exchange of units between companies and the proper allocation of assets under the right ownership.
In summary, Delek Logistics Partners is making significant strides to bolster its position in the Permian Basin with a series of strategic acquisitions and investments. The company's financial health is robust, as evidenced by the improved leverage ratio and the increase in quarterly distribution to unitholders. The leadership team expressed confidence in the company's direction and welcomed the H2O Midstream team into the DKL family.
InvestingPro Insights
Delek Logistics Partners (DKL) has demonstrated a commitment to its shareholders through consistent dividend payments and a focus on maintaining financial stability. As the company navigates strategic expansions and investments in the Permian Basin, the following insights from InvestingPro offer a snapshot of its current financial health and performance metrics.
InvestingPro Data indicates that as of the first quarter of 2024, DKL has a market capitalization of $1.88 billion and a Price-to-Earnings (P/E) ratio of 14.07. The company's revenue for the last twelve months stood at approximately $1.03 billion, with a gross profit margin of 36.5%. These figures underscore DKL's financial robustness and its ability to generate substantial earnings relative to its share price and overall market value.
An InvestingPro Tip highlights that DKL has raised its dividend for 11 consecutive years, signaling a strong track record of returning value to its shareholders. This is further corroborated by the company's impressive dividend yield of 10.96%, which is quite significant and compares favorably to many peers in the industry. Additionally, DKL's stock price has been relatively stable, with a low volatility that may appeal to investors seeking a less turbulent investment.
For investors interested in a deeper analysis of DKL's financials and performance, InvestingPro offers a plethora of additional tips. For instance, there are 9 more InvestingPro Tips available that can provide valuable insights into the company's profitability, stock price trends, and liquidity position. These tips are accessible through the InvestingPro product at https://www.investing.com/pro/DKL.
Incorporating these InvestingPro Insights into the broader narrative of Delek Logistics Partners' recent earnings report and strategic moves, it is evident that the company not only has a strong operational foundation but also maintains a shareholder-friendly approach. This combination may continue to position DKL favorably in the eyes of investors who are monitoring the company's progress in the competitive midstream services sector.
Full transcript - Delek Logistics Partners LP (DKL) Q2 2024:
Operator: Thank you for standing by. My name is Joel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners Q2 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Robert Wright, Deputy CFO. You may begin.
Robert Wright: Good morning, and welcome to the Delek Logistics Partners second quarter earnings conference call. Participants joining me on today's call will include Avigal Soreq, President; Joseph Israel, EVP Operations; Reuven Spiegel, EVP and Chief Financial Officer; and Odely Sakazi, SVP Delek Logistics. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including statements regarding guidance and future business outlook. These statements involve risks and uncertainties that may cause actual results to differ from our forecast. For more information, please refer to the risk factors discussed in the partnership's most recently filed annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC, along with the press release associated with this call. The partnership assumes no obligation to update any forward-looking statements or information. I will now turn the call over to Avigal for opening remarks. Avigal?
Avigal Soreq: Thank you, Robert. Delek Logistics Partners had another record quarter. We reported $102.4 million quarterly adjusted EBITDA. I am pleased with our continued performance. We have made several announcements today. DKL is a premier full-service crude water and natural gas provider in the prolific Permian Basin. And the transaction we have announced today will significantly enhance our position. First, let's talk about the contract between DKL, DK and Wink to Webster pipeline. We announced an amend and extent of the contract between DKL and DK. The extensions remove an overhang on the DKL unit. It moves away from a month-to-month to contract terms of up to seven years. These amendments allow us to acquire DK's interest in the W2W pipeline without significant strain on our balance sheet. W2W is a premier crude oil pipeline backed by investment grade counterparties. It increases the overall asset quality at DKL and enhance DKL Permian position. Second DKL announcement today is the investment in the new gas processing plant. This plant is highly subscribed and is estimated to generate cash on cash returns of more than 20%. We are looking to complete the plant during the first half of 2025. The last transaction DKL announced today is the acquisition of H2O Midstream for $160 million of cash and $70 million preferred. The transaction is immediately accretive to DKL on an EBITDA and free cash flow basis. The acquired asset fits very well within DKL existing footprint. As such further expand our capabilities to be a comprehensive provider of midstream services in the Permian Basin. Once this transaction are complete in the first half of 2025, a majority of DKL EBITDA will be from non-related parties, making DKL mostly independent midstream company. In July, the Board of Directors approved an increase in the quarterly distribution to $1.09 per unit. Delek Logistics has shown a strong track record of delivering value to unitholders. We are excited about the announcement that we have made today and the opportunities ahead of us. I want to welcome the H2O team to the DKL family and wish them continued success and good luck. I will now hand it over to Reuven.
Reuven Spiegel: Thank you, Avigal. As Avigal mentioned we are growing Delek Logistics with a prudent management of liquidity and leverage. The liquidity we created in the beginning of the year has allowed us to carry out a transaction we have announced today. We are also managing our leverage, which has improved to 3.81 times at the end of the second quarter of 2024 from its high point of 4.84 at the end at the end of 2022, and 4.34 at the end of 2023. Moving on to our second quarter results. The second quarter adjusted EBITDA was $102.4 million, compared to $92.8 million in the same period of 2023. The distributable cash flow was $68 million and the DCF coverage ratio was 1.32 times. For the Gathering and Processing segment, EBITDA for the quarter was $54.7 million, compared to $52.6 million in the second quarter of 2023. The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets. Wholesale Marketing and Terminalling EBITDA was $30.2 million, compared to $28 million in the prior year. The increase was primarily from higher terminal and utilization. Storage and Transportation EBITDA in the quarter was $16.8 million, compared to $15 million in the second quarter of 2023. The increase was mainly driven by higher storage and transportation rates. And, lastly the investment in pipeline joint venture segment contributed $7.9 million this quarter compared to $7.3 million in the second quarter of 2023. Moving on to capital expenditures. The capital program for the second quarter of 2014 was $10.2 million. Most of the spend in quarter was for growth projects, namely advancing new connections in the Midland and Delaware gathering system. Along with our previously announced capital budget for 2024, we expect to spend $90 million to $100 million in the second half of 2024 on new processing plant. With that, we can open the call for questions.
Q - Neal Dingmann: Hi. Good afternoon guys. Thanks for the time. First question is just on the H2O Midstream acquisition which looks very attractive. Just wondered, maybe can you talk a little bit about -- you mentioned here about the new full suite of services how that improves sort opportunities. I'm just wondering how that will improve as you have future customer opportunities. And then secondly, you all talked about the potential near-term costs and revenue synergies. I'd love to hear maybe more about that.
Avigal Soreq: Absolutely, Neal. So, three aspects to that. One, the same customer you can have a more comprehensive view about deals that you are doing with customers. The second point around that is that basically the operational are on top of each other, so you can be very efficient on the way you run your operations. And the third, this infrastructure can be relevant for both services. So, this is accretive -- very accretive deal for us and it is extremely synergistic.
Neal Dingmann: No, I would agree. And then secondly just on the new Delaware gas plant. What could the timing be? I know maybe jump in again a little bit on this one, but I like that -- I think there is a future additional gas processing opportunities you all could have around there beginning next year after you close. And I'm just wondering what -- how soon could you see some of those future gas opportunities? And what might that consist of?
Avigal Soreq: Yes. So our gas plant is completely synergistic with the current gas plant we have. We said that we're going to complete the second -- in the first half of 2025. And it's already been nicely subscribed. Odely, I don't know if you want to add into that.
Odely Sakazi: Yes just a little bit to your comments, Neal. To be honest, right now, we already have the associated need for additional capacity from what we're seeing with our producer currently and also going forward. So this is why we feel very comfortable on the volume on that new plant that is already highly subscribed as Avigal mentioned. So we see that timing pretty much as soon as possible from our stand.
Neal Dingmann: Great guys. Nice additions on both sides. Thank you.
Operator: Your next question comes from the line of Doug Irwin of Citi. Your line is open.
Doug Irwin: Hi. Thanks for the question. I just wanted to touch on the $55 million to $85 million EBITDA range you provided for the transaction this morning. I was wondering, if you could talk about some of the assumptions for high end versus the low end of that range. Is mostly dependent on some of the H2O Midstream synergies? Or are there maybe some other factors under consideration there? And then should we expect that to kind of be a good run rate for 2025? Or is that ramping overtime?
Avigal Soreq: So there are three main components around that, right like we outlined. One is the DK contract [indiscernible] Second is the W and third is the H2O Midstream and fourth the gas processing plant. What I think the majority of that is not coming from synergies is coming from the base business. And I think that a good estimation is to take the midpoint out of that. It's a good number to assume going forward.
Doug Irwin: Okay. Great. That's helpful. I was just wondering, if you could provide a little more detail around the funding expectations for cash component of these transactions. And if I look at Slide 6 in the presentation materials, it looks like maybe some units are changing hands here as part of the Wink to Webster and recontracting. Just wanted to clarify, I'm interpreting that correctly and if so, maybe get a little more detail around how that might play into the deconsolidation priorities of the DK.
Avigal Soreq: Yeah. Absolutely. So there are units that are changing hands, but the net amount is not big between the companies. So it's like we exchange value from one company to another and we got it pretty tax efficient. So that's good news. So we don't need to pay a lot of attention into that part the equation. What we basically did and you can appreciate that, I'm sure, we put the right asset under the right ownership. Put W to W where it naturally belongs and a exchanges for a value that belongs to the refineries.
Doug Irwin: Got it. That's all for me. Appreciate the questions.
Avigal Soreq: Thank you.
Operator: With no further questions, that concludes our Q&A session. I will now turn the conference back over to CEO, Avigal Soreq, for closing remarks.
Avigal Soreq: Thank you. So I would like to thank my leadership around this table, our employees, our Board of Directors, for you investors. And welcome the H2O team, to the Delek -- to the DKL family. Thank you, guys. And we'll talk next quarter.
Operator: This concludes today's conference call. You may now disconnect.
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