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Investing.com -- Mizuho initiated coverage of Delek Logistics Partners LP (NYSE:DKL) with a Neutral rating and $44 price target, saying the pipeline operator’s transition to a more independent growth-focused midstream business is promising but still faces valuation constraints due to limited scale, modest leverage, and uncertainty around its relationship with parent Delek US.
Once reliant on asset sales from Delek US, the master limited partnership has evolved into a more standalone player, now generating most of its revenue from third-party customers, Mizuho (NYSE:MFG) said.
Delek US has reduced its ownership in DKL to 63% from 79% in 2022.
Mizuho noted that DKL’s multi-commodity footprint in the Permian Basin, combined with a double-digit distribution yield, will appeal to midstream investors.
But the brokerage flagged limited free cash flow after distributions and moderate balance sheet pressure as factors that cap near-term upside.
DKL has grown nicely into its own, according to analysts at Mizuho, with five-year EBITDA growth averaging 14% annually.
However, Mizuho warned that weaker oil prices around $60 a barrel could slow future Permian activity, putting pressure on medium-term growth targets.
While Mizuho acknowledged potential upside if DKL completes a full “economic separation” from Delek or becomes a more prominent SMID-cap investment target, the form and timeline of such a shift remain unclear.
The bank said ongoing opacity around that transition acts as a modest overhang on the stock.
DKL trades at a slight discount to its peer group, which Mizuho sees as appropriate given its more constrained capital flexibility.
The $44 price target is based on an 8-times multiple of estimated 2027 EBITDA.