Delek US Holdings, Inc. Q3 FY2025 earnings call

• Safe and reliable operations: Strong operational quarter with refineries having record throughput, SRE had record throughput, and other refineries like Tyler, El Dorado, Big Spring had strong operations.
• EOP progress: EOP aimed to improve cash flow, supply and marketing had strong contribution from wholesale marketing, EOP contributed ~$60 million to P&L in Q3, and EOP guidance increased to at least $180 million annual run rate.
• SREs: EPA approved pending SRE petitions, expect $400 million proceeds from monetization of granted RINs, working on getting full value for 2019-2022 grants.
• DKL progress: Increased DKL's full year EBITDA guidance to $500-$520 million due to progress in Permian Basin.
• Shareholder-friendly: Paid ~$15 million dividend and bought back ~$15 million of shares, strong balance sheet, highest total return yield among refining peers.

In the third quarter, excluding SREs, Delek reported adjusted EBITDA of approximately $319 million and adjusted EPS of $1.52. For the refining segment, Tyler had a third-quarter throughput of 76,000 barrels per day with a production margin of $11.32 per barrel and operating expenses of $4.93 per barrel; El Dorado had 83,000 barrels per day throughput, $7.43 per barrel margin, and $4.50 per barrel operating expenses; Big Spring had 70,000 barrels per day throughput, $10.99 per barrel margin, and $7.20 per barrel operating expenses; Krotz Springs had 85,000 barrels per day throughput, $9.01 per barrel margin, and $5.35 per barrel operating expenses. The Logistics segment delivered approximately $132 million in adjusted EBITDA, an $11 million increase from the previous record. Supply and marketing excluding SREs contributed approximately $130 million, with ~$70 million from wholesale marketing, $6 million from asphalt, and the rest from supply.

• Increased EOP guidance to at least $180 million annual run rate.
• Increased DKL full year EBITDA guidance to $500-$520 million.
• Expect $400 million proceeds from SRE RINs monetization over 6-9 months.
• Fourth quarter operating expenses between $205-220 million, G&A $52-57 million, D&A $100-110 million, net interest expense $85-95 million.

• Uncertainties in SREs and their impact on refining throughput and margins, potential changes in EPA policies affecting SREs.

Q: Hopefully, I'll make this relatively easy. I've got 2 questions related to the SREs. Obviously, tremendous update from you guys this morning. But my question is on the refining throughput guidance, because you've given an RVO risk number, it looks like, for 2025. But it looks like all 4 of your refineries are basically going to be at or below the SRE threshold. So my question is, if that's the case, why should we not risk the RVO at 100%, in other words, you get 100% of the number? And then I guess, how should we think about that going forward? That's my first question. My second question is really more -- is kind of hypothetical, I guess, because we've got a Trump EPA currently. So presumably, because you've gained the SREs under the Trump administration, the minimum we should probably assume is you get the Trump EPA duration, which I guess is 4 years. My question is, what is your view on whether the rulemaking, the legal case and so on could transcend administrations? In other words, this becomes a perpetual SRE exemption for Delek.

A: Doug, thank you for the great question. And I will start, with your permission, obviously, with giving a bit overview on SRE and looking that on the big picture, and then Mohit will finish the technical part of the question, if you're okay with it. So listen, we said it very clear on our financials that we have $200 million impact on Q3 earnings, right? And we also -- I said on my prepared remarks that we have $400 million of cash coming at us in the next 6 to 9 months. And I want to make another point very, very clear, right? We're going to use this cash prudently with -- in line with our overall capital allocation guidance we gave many times. So we are not going to deviate from that. So I wanted to take a moment or 2 to talk about the 2019 and 2022 RINs. While we really appreciate EPA clearing the backlog, obviously, EPA remedy is invalid. We all understand it, right? It's very clear. But we believe that the relief and eligibility are not discretionary items. That's a very, very 2 words that I just -- very important 2 words I just said. And we are committed and confident to give to our shareholders and company full value of those pending petition from 2019 to 2022, both the court and the law are behind us, and we're going to follow through and make it happen. We have seen the precedence in the past around that, and we are confident we'll get it as well. Our throughput is completely normal with regular seasonal, so we can check that box. And I will let Mohit finish.

A: Yes. Thanks, Doug. Thanks for the question. As far as the 50% piece is concerned for 2025, that is not our expectation. Our expectation is 100% of our refining capacity qualifies for SREs, and we expect to get 100% of SREs for 2025 as we go forward. If you look at your other question about sustainability of these SREs beyond the current administration, we believe we are a country of law where the law is followed, and the law is clearly on our side. The courts, their decision is on our side, and we are very optimistic that this will transcend beyond the current administration.

Q: Congrats on a great quarter, guys. I just have a quick clarification question. The $688.6 million reported in total adjusted refining margin for the quarter, does it include the SRE benefits? Or does that exclude it? And similar -- and on similar line, the Slide 17, the margins that you have reported gross margin, it doesn't look like they have any SRE benefits. But could you clarify because some of your peers are reporting these gross margins with the benefits included. So if you could clarify on those things.

A: Yes, it's easy, $688 million includes and the margin that we reported do not include. So it's very, very easy to answer. I don't know, Mohit or Mark, if you have anything to add.

A: Yes. Manav, I'll just make one more point. So the reported gross margins for the refineries actually also have the RVO obligation in it. So the RVO obligation that we have flows through our gross margin. So they are post that obligation. That's what we are reporting.

Q: And one quick question more. I understand it's more on the midstream side. But look, Permian Sour Gas opportunity just continues to expand. You guys were there before many others. Help us understand what it means for, obviously, your midstream business, and then obviously, how DK benefits just because DKL benefits from this growing Permian Sour Gas opportunity?

A: Yes. Manav, thank you for the great question. And the sour gas opportunity in the Delaware Basin is something that we are all very excited of. We see that opportunity. We were ahead of the curve with the 3B -- 3Bear acquisition, and also ahead of the curve with the [ 2 Water ] acquisition. You see they multiple today, nothing that you can buy those assets today. [ Reuven ], here next to me, is going to give more extended discussion about the sour gas. That's a very big deal for us, and we were on the right timing with the right permits, and we are very happy about that.

Q: I wanted to ask about SRE cash. When does it hit the balance sheet? I was wondering if you've done the RIN sales with deferred delivery already or you're going to sell RINs in open market and liquidity will be there?

A: Yes. So Vikram, thank you for joining us today. We'll stick to the answer we gave in the prepared remarks that we expect to see the cash in the 6 to 9 months, and we leave the technical of trading outside of this call. And we are very happy about the improving of the position and very optimistic about SRE in general, and we'll leave it to that.

Q: And as a follow-up, you've raised the guidance. It has been raised multiple times, the EOP cash savings guidance. Can you talk about what the drivers of the most recent increase were? What initiatives you've taken? If there has been any change in underlying assumptions that drove the increase or you've seen opportunities and where those opportunities are?

A: Yes. Thank you for asking that question. That's really something I'm very proud and love to talk about. I have a lot of energy around the topic. Listen, first of all, EOP, it's not a project, it's a lifestyle. And it's a lifestyle across the organization. And we see how well it runs across our company and how confident we are with that, right? It's not just cost, it's cost and margin. We've seen a very nice improvement in margin this quarter. And we have 73 initiatives we are running on a weekly and a daily basis to make that happen. It's very clear in our earnings, very clear in our EBITDA, very clear in our cash flow. So all of that has cleared very, very well for us. A majority of those projects are in margin, but they are not related for the most part for market conditions. So that's another point of strength in our program. As you said correctly, this is the fourth time we are increasing the guidance. We started from a midpoint of $100 million, and now we are saying over $180 million, and that's going very well for us. So more to come. I do want to make another important comment. We started Q4 very well, and we see more upside on that going into this quarter.

Q: We wanted to ask, it looks like the wholesale side was particularly strong this quarter. I think you mentioned some structural improvements, and we know it's also been part of the EOP initiative. So can you unpack that a little, talk about some of the progress there?

A: Yes, absolutely. The bottom line is that's a bigger portion of the EOP progress we are doing. And I will let Mohit, that was very close to that, answer the rest of it.

A: Yes. I think wholesale is a great enterprise optimization plan story, and we have been improving the business in 3 phases. The first phase started by with our refining operations, and we started producing a lot of different kinds of products that we can sell in the market. We improved our logistics to get access to different kinds of markets, and that has helped our Wholesale business over the last 12 months or so. In the second phase, we started renegotiating our contracts. So these contracts have been renegotiated, and they are getting us the full value that our products deserve, based upon the markets that we serve. And the last phase, the Phase 3 in which we are, hopefully, it's not the last phase, but it's the Phase 3 in which we are. We are exiting some of the markets which are not as profitable for us, and we are entering new markets which are more profitable for us. And a combination of this strength is shown in our numbers. And as Avigal mentioned, that this strength has continued in the fourth quarter, and we expect to keep delivering these results on a go-forward basis.

Q: The third quarter, I mean, wholesale at $70 million and the supply at, say, $50 million to $60 million. Can you help us to understand that how much is related to your EOP and how much is being given to you from the market? In other words, that what is, say, core repeatable within that -- those 2 numbers? That's the first question.

A: Okay. So I think we have a slide on that in our deck that emphasize, if memory serves me right, around $40 million or so for market condition and the rest you can allocate to EOP. And as I said earlier, Paul, and you probably heard it loud and clear that Q4 looks very good from EOP standpoint. And the $60 million of EOP is something that we are very proud of.

Q: So Avigal, so let me make sure I understand. So out of that $120 million that on the supply and the wholesale, $40 million is from the EOP -- $40 million is from the EOP, and then, say, $80 million is from the market?

A: Yes. So Paul, you got those numbers wrong. Let me just try to clarify it for you very quickly. The $40 million is the market impact. And as I said in the last -- answer to the last question, wholesale is the one which is driving it. We are seeing a lot of structural strength in the business. We have seen this trend continue in the fourth quarter. And we have clearly highlighted what the market impact was. There's obviously seasonality in it, because second quarter and third quarter are stronger than the fourth quarter and first quarter, but we've seen the fourth quarter strength continued from the third quarter this year. And as far as the specific division is concerned, I can take that offline with you post the call.

Q: And just curious that with the SRE, is that going to impact in your how you run El Dorado and Krotz Springs? I suppose that you want -- you probably want to keep your crude throughput for those 2 facilities to be below 75, even when the margin is very high. Is that how you're going to run it or that you're going to look at them somewhat differently? Because if the margin is really good, it may be better off for you not to get the SRE and still get a better margin. So I want to understand that how is the decision-making tree is going to look like?

A: Yes, Paul, thanks for that question. I'll try to answer this question as well. So we've seen -- you've seen our history. We have stayed in full compliance with the law, and we intend to stay in full compliance with the 2025 RINs obligation, RVO obligations as well. As far as the throughputs are concerned, our throughput guidance is very clear, and it is based upon the usual fourth quarter seasonality that we experience.

Q: I just wanted to go back to the supply and trading results, because, I guess, it's still kind of not completely clear how much is structural in nature. And historically, you've talked about some of the wholesale and supply strength related to Group 3 pricing over the Gulf Coast. So how much of the 3Q result and going forward is sensitive to that spread versus other improvements that you've made?

A: Jason, thanks for the question. So as I've mentioned in the previous answer, our whole idea of enterprise optimization plan is to reduce our dependence upon things like that, the one that you just described, like dependence -- excessive dependence upon Group 3 market or any specific market. Once you reduce that dependence, these changes become extremely structural, and that is what we are seeing. So the $70 million that you saw, obviously, it has helped from the seasonal benefit as far as wholesale is concerned. But as far as structural part is concerned, we are very, very confident, and that's why we are seeing the strength continue in the fourth quarter. And as far as if you have more questions in terms of divisions, and how much is flowing through the numbers, I can take that with you offline as well.

Q: In terms of the monetization of that $400 million, can you talk about kind of upside and downside risks to hitting that $400 million number?

A: No. I think $400 million is a good number to model, and we'll leave it to that. Obviously, we're going to keep, as I said in my prepared remarks, we're going to keep the capital allocation policy we have, a very strict dividend throughout the cycle, balanced approach to dividend -- to buyback and balance sheet. And I think the market knows by now that we had a very, very good quarter, a very, very good year in terms of return to investors. We are very proud of being the first one among all of our peers, and we are very committed to keep rewarding our shareholders.