Earnings call transcript: Delek Logistics misses Q4 2024 EPS forecast

Delek Logistics Partners LP (NYSE:DKL) reported its fourth-quarter 2024 earnings, revealing an earnings per share (EPS) of $0.68, which fell short of the forecasted $0.7239. The company’s revenue was $209.86 million, also missing the expected $253.99 million. Despite these misses, the stock price of Delek Logistics saw a 2.45% increase, closing at $40.02. The company, which offers an attractive 11.04% dividend yield, appears slightly undervalued according to InvestingPro Fair Value metrics, potentially explaining investor optimism despite the earnings miss.

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Key Takeaways

• Delek Logistics reported an EPS of $0.68, missing the forecast of $0.7239.
• Revenue came in at $209.86 million, below the expected $253.99 million.
• Stock price rose by 2.45% post-earnings announcement.
• Strategic acquisitions and expansions are underway in key areas.
• The company announced a 48th consecutive quarterly distribution increase.

Company Performance

Delek Logistics Partners demonstrated resilience in its operational performance despite missing financial forecasts. The company’s adjusted EBITDA for Q4 2024 reached $107.2 million, an increase from $100.9 million in the same quarter of the previous year. With a solid Financial Health Score of 2.5 (FAIR) from InvestingPro and a strong 9% revenue CAGR over the past five years, the company’s focus on expanding its service offerings in the Permian and Delaware Basins appears to be a strategic move to enhance future growth prospects.

Financial Highlights

• Revenue: $209.86 million, down from the forecasted $253.99 million.
• Earnings per share: $0.68, below the forecast of $0.7239.
• Adjusted EBITDA: $107.2 million, up from $100.9 million in Q4 2023.
• Distributable Cash Flow: $69.5 million with a DCF coverage ratio of 1.2x.

Earnings vs. Forecast

Delek Logistics’ EPS of $0.68 missed the forecast by 6%, while revenue was 17.4% below expectations. This marks a deviation from the company’s usual performance trend, raising questions about the factors impacting these results.

Market Reaction

Despite the earnings miss, Delek Logistics’ stock price increased by 2.45%, closing at $40.02. This movement suggests that investors are optimistic about the company’s strategic initiatives and future growth potential, possibly driven by its ongoing expansions and acquisitions.

Outlook & Guidance

Looking ahead, Delek Logistics has set an EBITDA guidance of $480-$520 million for 2025, indicating a projected 20% growth. The company plans to invest $75 million in the Libby processing plant expansion and $160 million in growth and maintenance projects. Additionally, a $150 million buyback from its sponsor has been authorized. Analyst consensus suggests potential upside, with price targets ranging from $36 to $50 per share.

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Executive Commentary

"2024 has been a transformational year for Delek Logistics," stated Avigal Sorek, President. He emphasized the company’s progress in economic separation and its comprehensive service offering strategy, which are expected to drive future growth.

Risks and Challenges

• Economic uncertainties could impact demand in key markets.
• Potential integration challenges with recent acquisitions.
• Fluctuations in energy prices may affect profitability.
• Regulatory changes could pose compliance challenges.
• Supply chain disruptions might hinder operational efficiency.

Q&A

During the earnings call, analysts inquired about the conservative EBITDA guidance and the rationale behind the buyback strategy. Executives highlighted the strong demand and utilization of key assets, reinforcing the company’s comprehensive service offering strategy as a key growth driver.

Full transcript - Delek Logistics Partners LP (DKL) Q4 2024:

Jaylen, Conference Operator: Thank you for standing by. My name is Jaylen, and I will be your conference operator today. At this time, I would like to welcome everyone to the DKL Fourth Quarter twenty twenty four Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

I would now like to turn the conference over to Robert Wright, Deputy CFO. You may begin.

Robert Wright, Deputy CFO, Delek Logistics Partners: Good morning, and welcome to the Delek Logistics Partners’ fourth quarter earnings conference call. Participants joining me on today’s call will include Avigal Sorek, President Ruben Spiegel, EVP Mark Hobbs, EVP. 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. Any forward looking statements made during today’s call involve risks and uncertainties that may cause actual results to differ materially from today’s comments. Factors that could cause actual results to differ are included in our SEC filings.

The company assumes no obligation to update any forward looking statements. I will now turn the call over to Avigal for opening remarks. Avigal?

Avigal Sorek, President, Delek Logistics Partners: Thank you, Albert. Telect Logistics’ partner had another record quarter. We reported approximately 107,000,000 in quarterly adjusted EBITDA. 2024 has been transformational year for Delek Logistics and we are pleased with its continued strong performance. In 2024, DKL is taking key steps to becoming a premier full service, crude, natural gas and water provider in the prolific Pearland Basin and we expect to make further progress in 2025.

I would like to take a moment to reflect on the things we were able to accomplish in 2024. We increased the financial and trading liquidity of DKL. We were also the first MLP to do two primary offerings in a year since 2017. We amend and extend contact between DKL and DK for a period of up to seven years providing certainty around cash flows. We completed the acquisition of Delek portion in Wing To Webster pipeline which increased the overall asset quality at DKL and enhanced DKL permanent position.

We announced two acquisitions in the Midland Basin, EdgeCoord Midstream and Gravity Water Midstream enhance our competitive position in the Midland Basin significantly. We are excited about our combined offering and we are extremely pleased with the initial success we have seen so far. In the Delaware Basin we are also making good progress in our processing plant expansion. The expansion is set to complete on time and on budget in the first half of twenty twenty five. As we complete the plant expansion we also announced an FID on acid gas injection at the Levy Complex.

AGI wells and sour gas treating capabilities enhance our competitive position in the Delaware and provide a good runway of growth for Delek Logistics in the future. Looking forward in 2025 we’ll continue to grow the partnership to prudent management of leverage and coverage. DKL also initiated a strong 2025 EBITDA guidance of $480,000,000 to $520,000,000 This represents around 20% growth over 2024 adjusted EBITDA. DKL continued to provide one of the best combination of yield and growth in the entire AMZI index. We’ll continue to increase our economic separation with our sponsor DK.

We are progressing the economic separation in few different ways and today we have announced an additional tool to enable the deconsolidation. Our Board of Directors have authorized up to $150,000,000 buyback from our sponsor DK to enhance value for the DKL unitholders. I’m also pleased to announce that the Board of Directors has approved the 48 consecutive increase in the quarterly distribution to $1.1 per unit. To conclude, we are very excited about the prospect of Delek Logistics. We expect to continue on our value creation path moving forward and we will continue to grow our distribution in the future.

I will now hand it over to Mark.

Mark Hobbs, EVP, Delek Logistics Partners: Thank you. As Abigail mentioned, we are growing Delek Logistics with a prudent management of liquidity and leverage. We manage our financial liquidity throughout 2024 by accessing both the debt and equity markets. Post the close of our acquisition of Gravity Water Midstream, we have approximately $530,000,000 liquidity. We are also managing our leverage as we complete several important organic growth projects this year.

Moving on to our fourth quarter results. The fourth quarter adjusted EBITDA was $107,200,000 compared to $100,900,000 in the same period of 2023. Distributable cash flow as adjusted was $69,500,000 and the DCF coverage ratio was approximately 1.2 times. As mentioned previously, we expect this ratio to steadily move back to our long term objective of 1.3 times in the second half of twenty twenty five. As for the Gathering and Processing segment, adjusted EBITDA for the quarter was $66,000,000 compared to $53,300,000 in the fourth quarter of twenty twenty three.

The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets and contribution from H2O Midstream. Wholesale marketing and tourmaline adjusted EBITDA was 21,200,000 compared to $28,400,000 in the prior year. The decrease was primarily due to lower wholesale margins and impact of intercompany transactions. Storage and transportation adjusted EBITDA in the quarter was $17,800,000 compared with $17,500,000 in the fourth quarter of twenty twenty three. The increase was mainly driven by higher storage and transportation rates.

And lastly, the investments in Pipeline Joint Ventures segment contributed at $11,300,000 this quarter compared with $8,500,000 in the fourth quarter of twenty twenty three. The increase was primarily due to the contribution from the Wink to Webster drop down in August of last year. Moving on to capital expenditures. The capital program for the fourth quarter was $49,400,000 of which $42,100,000 was allocated to the new gas processing plant. The remainder of the spend in the quarter was for growth projects, namely advancing new connections in the Midland and Delaware gathering systems.

Along with initiating our full year EBITDA guidance of approximately $500,000,000 at the midpoint, we’ve also announced today our 2025 capital guidance. In 2025, we expect to spend a total of approximately $75,000,000 on completing our Libby processing plant expansion and approximately $160,000,000 on growth and maintenance projects. With that, we can open the call for questions.

Jaylen, Conference Operator: Thank you. The floor is now open for questions. Your first question comes from the line of Doug Irwin of Citi. Your line is open.

Avigal Sorek, President, Delek Logistics Partners: Hey, good morning Doug.

Doug Irwin, Analyst, Citi: Hi, thanks for the questions. Good morning. I just want to look at EBITDA guidance here. Just looking at some of the prior benchmarks you’ve put around the acquisitions and the processing plant expectations, a relatively conservative guide at least at the low end of the range. So I was just curious if you could maybe talk a little bit about what might drive the high end versus the low end tier and then maybe kind of where you see yourself exiting the year given some of the moving pieces throughout?

Avigal Sorek, President, Delek Logistics Partners: Hey, Doug, thanks for the question. And listen, that’s the first time we’re giving guidance. DKL obviously is a growing company as we demonstrate and as you can very well see. Obviously, we are increasing the economical separation between DK and DKL in every step that we are doing and for sure with the step that we announced today of the $150,000,000 buyback from our sponsor. And we want to help you and others to model us better and that’s what we try to do today.

We feel confident with the guidance we gave today and obviously we are looking forward to update you down the road. If there is more modeling question, obviously you can follow-up with Mohit for more detailed questions how to get the exact model, but that’s where we are today. And obviously there is always opportunities in the future.

Doug Irwin, Analyst, Citi: Understood. And yes, appreciate the first time guidance. Maybe a follow-up on the buyback program, maybe a two part question here. Just first, just curious how quickly you expect to be able to execute on that $150,000,000 And then second, just how you’re thinking about funding these 5x? Are you looking to potentially fund it all internally with free cash flow?

Or you may be willing to use debt here given the discounted yield relative to where the equity is trading? And if so, I’m just curious where you see leverage over the near term.

Avigal Sorek, President, Delek Logistics Partners: Yes, absolutely. So if we’re looking at it from a free cash flow standpoint, Doug, and I’m sure that you can appreciate it, Our cost of capital on the debt side is around 7% and what we see here today at $40 is close to $11 So that’s obviously very beneficial from a free cash flow standpoint for DKL and that’s something that our partnership liked a lot. Also you can for sure appreciate that the deconsolidation effort is an initiative of both companies, both DKL and DK and the reason is that it will allow DKL to completely fulfill its potential without sponsor. So those two initiatives are very well embedded in that. We are not going to give guidance, specific guidance.

It’s going to be subject to market condition and DKL offering that to DKL, But that’s something that we definitely look very closer and working hard on that. But I will let Reuven to chime in more of that and to give some more color.

Reuven Spiegel, EVP, Delek Logistics Partners: Well, just two bullet points. One, it’s a two year program and we have to execute that while complying with the company covenant and leverage ratio targets. And obviously that will be in place as long as the DKL share price makes sense from free cash flow accretive for the company.

Doug Irwin, Analyst, Citi: Understood. Thanks.

Avigal Sorek, President, Delek Logistics Partners: Thank you.

Jaylen, Conference Operator: Your next question comes from the line of Neal Dingmann of Truist Securities. Your line is open.

Doug Irwin, Analyst, Citi: Hey, Neal. Good morning.

Neal Dingmann, Analyst, Truist Securities: Good morning. Thanks for the time, guys. My question is a little bit about the same good, but love to see the guidance. Obviously, it looks great on EBITDA. I’m just wondering, besides you mentioned release, which nice to see the upside that’s going to happen around the Libby plant expansion.

Could you speak to maybe just maybe other notable drivers you would share with us that’s driving this upside potential around the EBITDA you’re showing this year?

Avigal Sorek, President, Delek Logistics Partners: Yes. So we have many chips in this guidance, right? We obviously finished the Cavity deal. We finished the H2O deal. We announced the Levy plant.

We announced the AGL and the SOWRE effort. And obviously there are synergies among all of that and we have W2W. So there is really a mix of transactions we have done and we felt, Neil, that it’s very much necessary to give you guys a clear guidance and making your life just a little bit easier in terms of where we land. And I think it’s very important to investors to see how much our currency is cheap versus the entire ANSI index and how good of a position it is. So I think that’s the reason we decided to give that because of the amount of transaction we did and to reflect more how discounted we think our currency is.

So that’s the reason we did it and I’m sure that you can appreciate it.

Neal Dingmann, Analyst, Truist Securities: I would definitely appreciate that the discount is definitely obviously seen out there right now. And then my just my follow-up would be on the key three bear assets here which continue to be so good. Just wondering how is when you look at those assets, just wondering how is demand and utilization of these assets looking?

Avigal Sorek, President, Delek Logistics Partners: Yes. So we would not expand those assets if you wouldn’t see a strong demand. Obviously, the gas in the Delaware area looks very good. We have many discussions with our producer that we have accurate dedication with. But another point I would like to highlight for you, Neil, is our comprehensive offering of crude gas and water proved it very nicely in the Delaware and that’s part of the reasoning that we implemented the same concept also in the Midland Basin.

So that’s paying us dividends and we are very happy about that. That’s the reason we felt confident with Libby two or the expansion and we went also to the start. So we feel confident and to our start to the tactics and also to the strategy.

Neal Dingmann, Analyst, Truist Securities: Very good. Thank you.

Jaylen, Conference Operator: With no further questions, that concludes our Q and A session. I will now turn the conference back over to Avigash Sorek for closing remarks.

Avigal Sorek, President, Delek Logistics Partners: Yes, absolutely. Thank you. Today, I would like to thank my colleagues around the table. I would like to thank the entire STEREC Logistics employees, our Board of Directors and for you investors and we’ll meet again in the next quarter. Thank you.

Jaylen, Conference Operator: This concludes today’s conference call. You may now disconnect.

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