Delek US Holdings downgraded by Moody’s

Investing.com -- Moody’s Ratings has downgraded Delek US Holdings (NYSE:DK), Inc.’s Corporate Family Rating (CFR) to B1 from Ba3, while maintaining a negative outlook for the company.

The rating agency also lowered Delek’s Probability of Default Rating to B1-PD from Ba3-PD and downgraded the rating on the senior secured term loan B to B2 from B1. The SGL-3 Speculative Grade Liquidity Rating remained unchanged.

"The downgrade of Delek US Holdings, Inc.’s ratings reflects its weak credit metrics, high gross debt serviced by earnings of its refining assets and the need for the company to improve the profitability of its refining assets," said James Wilkins, Moody’s Ratings Vice President - Senior Analyst.

The downgrade comes as Delek faces weak profit margins, negative free cash flow, and high gross leverage on its refining and marketing operations. Moody’s expects the company will continue to generate negative free cash flow due to below mid-cycle industry crack spreads and planned capital expenditures exceeding maintenance levels.

Delek’s gross debt, excluding debt from Delek Logistics (NYSE:DKL) Partners, LP (DKL, B1 stable), is considered high relative to the cash flow generation potential of its refining assets throughout the industry cycle. On a consolidated basis, the company currently has high leverage after generating negative EBITDA and retained cash flow during the twelve months ended March 31, 2025.

The company has been working on initiatives to improve its cost structure and optimize refining operations, which it expects will generate run rate savings of $120 million per year in the second half of 2025. Despite these efforts, Moody’s does not anticipate positive free cash flow generation in 2025.

Delek’s cash balances stood at $622 million (excluding DKL cash) as of March 31, 2025, which have historically supported its liquidity through volatile refining market cycles. However, these balances have declined, providing less of a liquidity cushion and financial flexibility.

The company operates four refineries located in Texas, Louisiana and Arkansas with a combined crude oil throughput capacity of 302 thousand barrels per day. These refineries can benefit from growing Permian crude oil production and other locally-sourced crudes purchased at a discount to WTI Cushing prices.

Delek also benefits from more stable earnings generated through its ownership interest in DKL. However, the company is considering strategic initiatives that could reduce its ownership in DKL, which Moody’s notes would be detrimental to Delek’s credit profile if not paired with meaningful debt reductions.

The secured term loan’s B2 rating, one notch below the B1 CFR, reflects the priority claim of the $1.1 billion revolving credit facility, which shares the same collateral as the term loan.

Delek maintains adequate liquidity, supported by its large cash balance, significant availability under committed bank facilities, and distributions from DKL. At the end of Q1 2025, Delek’s $1.1 billion ABL revolving credit facility had no borrowings and outstanding letters of credit totaling $383 million, leaving $717 million of borrowing capacity.

The negative outlook reflects high leverage on the refining assets at the current level of earnings, weak cash flow generation, and the need for Delek to execute on its Enterprise Optimization Plan initiatives to make its refining assets competitive through refining cycles.

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