Delek US Holdings, Inc. Q3 FY2024 earnings call

Safe and Reliable Operations

• Strong operational quarter with progress in Big Spring, Krotz Spring turnaround, and El Dorado refinery efforts.

Sum of the Part Value

• Closed dropdown of Wink to Webster and other intercompany transactions, sale of retail asset to FEMSA, Direct Logistics acquired H2O Midstream. Made progress on deconsolidation between DK and DKL with recent amend and extend contracts bringing additional $60 million annual cash flow to DK.

Cost Reduction and Margin Improvement Plan

• New plan to achieve at least $100 million run rate in cost savings and margin increase by second half of 2025, including $30-$40 million in G&A and cost efficiencies, and $50-$80 million from commercial optimization and process improvement.

Refining segment had a $32 million decrease in adjusted EBITDA primarily due to a lower-margin environment. Logistics segment delivered $106 million in adjusted EBITDA. Supply and marketing's contribution in Q3 was $11 million, with ~$13 million from wholesale marketing and a $2 million loss from asphalt. Refining product inventory remains low and oil demand continues to rise, but refining margin is $5 to $6 below mid-cycle.

Fourth Quarter Guidance

• Implied system throughput target: 265,000 to 276,000 barrels per day.
• Operating expenses expected: $177-$188 million, G&A: $53-$58 million, D&A: $95-$105 million, net interest expense: $75-$80 million.
• EOP plan to generate at least $100 million run rate benefits by 2025, agnostic to market condition.

• Refining margin remains below mid-cycle, which may lead to more refinery capacity shutting down.
• Market conditions and volatility affecting product netbacks and overall financial performance.

Q: Good morning, team, and thanks for the rundown here. So the first question is really on El Dorado. And as you indicated, the margins did come in a little bit softer than expected. Is there anything more one timey in nature? And can you talk, spend more time talking about how you see this progressing from here in the path for improvement?

A: Yes. Hi, Neil. Good morning. How are you? It's Avigal. Yes El Dorado will answer that specifically. First of all, it's a very good complexity refinery from a Nelson standpoint and there is a lot of flexibility around that asset. I've been around that asset for a long time and this is the best I've ever seen it done from an operational standpoint. And Joseph will provide more details about the exact specific action we are doing to improve that over time, please. Joseph. Yes. Thank you. Like Avigal mentioned, the El Dorado refinery is well positioned from asset configuration and also operations excellence 10.2 compete. So having these two, we feel now is the perfect time to address the market access gaps and take profitability really up to its potential. We have discussed those gaps in the past and more importantly took our time to plan and design solutions which we are already in full execution mode. As mentioned in our remarks, by mid-next year we will have in place new and robust process, logistics, and marketing tools in our kit to support future cash flow contribution with an incremental $2 per barrel of net margins. And I want to be a little bit more specific. So on the refinery level, we will connect to existing tines in our crude unit to draw approximately 3,000 barrels per day of jet fuel. We have yield and liquid recovery initiatives mainly around the FCC vacuum tower and asphalt. And then on the commercial front, the team is working really contracts to utilize the new logistics capabilities and move our products to additional markets for better netbacks. I hope it helps.

Q: Your next question comes from the line of Manav Gupta of UBS. Your line is open. Hi guys. Help us understand a little better. You are looking for, you know, multiple growth projects in the midstream space. So as we look at DKL, in your opinion, I'm not asking for exact guidance but how should we look at you know, exit rate EBITDA maybe year 2025 for something like a DKL?

A: So. Hi Manav, how are you? It's Avigal. So we didn't give guidance on DKL for 2025. We obviously have exciting time. We think we can have good traction around the market but we are not going to give guidance for the end of 2025. We're in a comfortable and great situation and Mohit can give more color around it. Mohit Bhardwaj: Hi Manav, how are you? So what we have said in the past, if you remember on our last earnings call that you know, based upon the investments that we are making a net addition of $70 million in midstream EBITDA. And I think that should give you some color on you know, how based upon our EBITDA is today and that net addition of $70 million in EBITDA where that will take DKL to you. But as Avigal mentioned, DKL has not provided a 2025 guidance just yet.

Q: Your next question comes from the line of Matthew Blair of TPH. Your line is open. Thank you and good morning. Maybe we could stick on the CapEx cut for 2025. Could you talk about what's rolling off relative to this year and then that midpoint 160? Should we think of that as your minimum level going forward or would you expect to have some catch-up in 2026?

A: No. So we are not going to change our overall guidance for the year. Obviously, we are putting management that we see them a low-margin environment and we have opportunity to have a low CapEx here on the refining side. And that's what we are doing on a sustainable basis. The way I think about it Matt, is that we are seeing around $25 million in each one of our refineries in a year that we don't have turnaround. Turnaround costs around a $100 million. And we are doing that on our four assets every five years. So that's a good way to look about the long-term CapEx of refining.

Q: Your next question comes from the line of Joe Leach of Morgan Stanley. Your line is open. Hi, good morning team, and thanks for taking my questions. So I wanted to ask on Slide 8 which is the mid-cycle EBITDA slide, can you just unpack the path to achieving that around $550 million of mid-cycle refining EBITDA number? Cracks are of course a driver and it looks like a piece of that is also running better. I'm getting an implied throughput of around 315,000 barrels a day. So if you just touch on some of the steps to realize that uplift that would be great. Thank you.

A: Yes, absolutely. Joe, thank you for joining us today. So obviously a key part of that understanding that slide that we are wanting to demonstrate the cash flow generated on DK Solo and to show the combination between Delek Solo and DKL and enhance our great position. EOP going to be a key part of that. We gave some color around EOP. EOP is the combination of what we can control which is market agnostic. We got the team behind this idea and we are well in the execution phase and we are very optimistic about that. Around exactly modeling and et cetera. I would like maybe you have a post-call with Mohit and go over the details that you can model all of that to your benefit. But that's the essence of that slide.

Q: Your next question comes to the line of Doug Leggate of Wolfe Research. Your line is open. Thanks guys. I've got two if I may. One, I'm sorry to be up on the Slide 8, but I have some clarification questions around this just to make sure, we understand what's going on. The $100 million EOP looks like that is the entirety of the standalone mid-cycle free cash flow. In other words, without the EOP there is no free cash flow. I just want to make sure that we are interpreting that correctly because ultimately if we look at the equity value, you are putting a four to five times EBITDA multiple. $100 million of free cash flow at a 10% annuity discount rate is $1 billion. So I am curious how you get the you know, the valuation that you're showing on this slide for $100 million of free cash flow. That's my first question. My second question is, at least on our numbers, the entirety of a large part of your value is your interest in Delek Logistics. As you know, there's been some transactions, particularly around sour gas injection wells, amongst other things. It seems there's a lot of embedded value potentially in DKL that could be released. And I'm just curious strategically I think you've talked about it as the bazooka option. What are your options to release value from DKL? So two questions, please.

A: Yes, so I will start with the first one. Then Mohit will give some more color around that page and then Mark and I will give you some more understanding of the market. So we see a lot of value in our asset. You can see the capture rate that we have demonstrated is relative to our peers is improving on a relative basis and we are very optimistic around that. EOP is a key part of what we are doing and EOP going to happen. Just to make it very clear on the G&A side, we are well into the execution phase and also in the OpEx, in the commercial. So the EOP plan going to execute. And as I said on my prepared remark, and you probably saw that Doug, that the $100 million is at least, I expect to see a higher number than that. So you can expect to see a higher free cash flow than that while we are on the execution phase. So more to come and some of that is already coming in place very quickly. So we are optimistic around our action and we are confident around the market. So we are very optimistic about the ability of DK Solo to generate significant free cash flow on a mid-cycle basis. Regarding the question of the midstream, we obviously are very encouraged by the transaction we've seen around us. Let's put a very high mark on our asset. I know that Mark is very close to that, so I will have Mark maybe give you some more color. Mark Hobbs: Yes, sure. Thanks, Avigal, and thanks Doug for the question. Deconsolidation, you know we spoke about deconsolidation quite a bit over the past, you know, year plus and that remains our top strategic priority. And we are actively pursuing that as a key component of our sum-of-the-parts efforts. And you mentioned appropriately so the recent transactions and the acquisitions on the midstream side specifically targeting the Permian Basin. And look, we see that as well and those have been going for in our estimation, very attractive and premium valuations. And as you know at Delek Logistics, we've over the years we've built a strong third-party midstream business in both the Midland Basin via DPG and our recent H2O transaction, as well as in the Delaware Basin where we continue to see attractive growth opportunities given significant activity of our upstream customers. And so we are in a good position. We think that we built a very attractive and valuable midstream business as you duly noted, through Delek Logistics. And we think this market backdrop really supports the value that we built. And as we pursue deconsolidation efforts on Slide 5, you know, we put a list of what we see those options potentially available to us and available to us in the market. You know, we believe that this market backdrop really positions us well to maximize value for really all our stakeholders. And what I would say about the actual actions that we might take and look at all options are on the table and we continue to evaluate all those options.

Q: Your next question comes from the line of Roger Read of Wells Fargo. Your line is open. Yes, thank you. Good morning. Can we come back to the $100 million of the EOP? Like how did you come up with that number? And what I'm curious is, was it top down, bottom-up combination of the two? You've talked obviously about some additional flexibility in it. So if you were to think of a low level of, hey, this would be successful at $80 million over the next 18 to 24 months or it could be $140 million. Should we think about it as a percentage of total costs as one of the ways to think about success here? I'm just curious, kind of, you know, in the end, $100 million is a nice round number, but how do we know it's a solid number based on you know, a real solid foundation?

A: Yes. So thank you, Roger, for the question. Obviously, the EOP is a bottom-up project. It's not something that obviously we rounded. It didn't end up 100. Exactly. Just to be clear. And as I said in my prepared remark, the number is saying at least so that give you the comfort level around that. EOP is market agnostic. As I said in the previous one of the questions, The G&A is $30 million to $40 million dollars of debt and based upon systems that we already did in the past. And the other $50 million to $80 million is a combination of OpEx and the commercial optimization. The idea, basic idea of EOP is a free cash flow and how to generate more free cash flow and agnostic to market condition. That's the essence of that. And obviously, if you need some more help about modeling that, I'm sure that Mohit would love to help you on that. But we have those combination of those two. Robert, you want to add into that more. Robert Wright: Just one clarification that the EOP project are -- do not include the initiatives or the benefits that we got from other, you know, from other initiatives. Like there are net initiatives, operation initiatives, G&A initiatives, and they do not -- do not include other benefits like intercompany transactions.

Q: Your next question comes from the line of Jason Gabelman of TD Cowen. Your line is open. Good morning. Thanks for taking my questions. My first one's on the balance sheet. I just wanted to get an updated view of what your target net debt and cash balances are at the parent following the divestment of the retail sale and all the other recent transactions that you've done.

A: Yes. So Jason, thank you for the question. Again, our capital strategy is very simple. Right. We want to maintain a strong dividend throughout the cycle. We want to make sure that we have a balanced approach between the buyback and improving the balance sheet. We have mentioned in a previous call that our target is around $600 million if memory serves me right. But that's a longer-term view and we're going to stick to the capital allocation program that we outlined.

Q: Your next question comes from the line of Jason Gabelman of TD Cowen. Your line is open. Okay. All right. Thanks for those answers.

A: You bet.