Delek US - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was weak on refining margins but showed progress on strategic priorities: adjusted net loss was $144.4M ($-2.32 per share) and adjusted EBITDA was $26.5M; GAAP net loss was $172.7M ($-2.78 per share). Logistics delivered record adjusted EBITDA ($116.5M), partially offsetting refining losses.
• Revenue of $2.642B modestly beat Wall Street consensus ($2.628B) and adjusted EPS beat consensus ($-2.32 vs $-2.43), while EBITDA missed materially, reflecting lower crack spreads and seasonal headwinds; CFO highlighted sequential EBITDA improvement versus Q4 due to stronger refining margins and throughput. Values for estimates retrieved from S&P Global.*
• Management raised EOP confidence to “at least $120M” run‑rate cash flow improvement in 2H’25 (from $80–$120M prior) and executed intercompany transactions that pro forma increase DKL third‑party EBITDA to ~80% and unlock >$250M of consolidated liquidity—advancing midstream deconsolidation.
• Capital returns continued: ~$32M DK buybacks and $0.255/share dividend ($15.9M total) in Q1; liquidity remained solid with $623.8M cash and net debt of $2.41B (ex‑DKL net debt: $267.9M).

What Went Well and What Went Wrong

What Went Well

• Logistics posted another record quarter: Adjusted EBITDA rose to $116.5M (vs $99.7M YoY), aided by W2W dropdown and H2O/Gravity acquisitions; DKL reiterated FY25 Adjusted EBITDA guidance of $480–$520M and began commissioning Libby 2.
• Strategic progress on SOTP/deconsolidation: intercompany agreements increase DKL third‑party cash flows to ~80% and unlock >$250M of consolidated financial availability; “We remain confident that we will complete the DKL deconsolidation…that will create value” (CEO).
• EOP traction: management now expects “at least ~$120 million” run‑rate improvement in 2H’25; operational upgrades (e.g., Tyler alky upgrade +500 bpd of high‑value products; El Dorado capture rate improvement ~$0.80/bbl in Q1) underpin margin capture gains.

What Went Wrong

• Refining profitability deteriorated due to lower crack spreads (benchmarks down ~29.8% YoY); refining adjusted EBITDA fell to $(27.4)M vs $110.1M YoY; total production margin per bbl dropped to $5.75 from $12.55 YoY.
• Corporate/Other adjusted EBITDA loss widened to $(62.2)M (vs $(58.2)M YoY), driven by W2W dropdown impacts and restructuring/transaction costs.
• Supply & marketing posted a $(23.7)M loss (seasonal wholesale and asphalt weakness), though trends improved into Q2 amid stronger group differentials (management commentary).

Transcript

Operator (participant)

My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek US First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. I would like to turn the conference over to Robert Wright, Senior VP of the U.S. Branch. You may begin.

Robert Wright (SVP)

Good morning and welcome to the Delek US First Quarter Earnings Conference Call. Participants joining me on today's call will include Avigal Soreq, President and CEO; Joseph Israel, EVP Operations; and Mark Hobbs, EVP and Chief Financial Officer. Today's presentation material can be found on the Investor Relations section of the Delek US website. Slide two contains our Safe Harbor Statement regarding forward-looking comments. Any forward-looking information shared during today's call involves 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 here as well as within 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 Soreq (CEO)

Thank you, Robert. Good morning and thank you for joining us today. Despite continued challenging refining margin environment, which was around $4 below mid-cycle, Delek continued on its transformational journey. On the first quarter, we made further progress in improving our operational performance by conducting two important planned outages at Tyler and Big Spring. We continue to make strong progress on our EOP plans. We also continue to advance our some-of-the-past efforts to additional intercompany agreements between DK and DKL. Let me highlight the progress we have made on our key priorities. First, safe and reliable operations. We have made further progress in improving the operations throughout our company. We successfully completed an ALKI turnaround at Tyler and maintenance at several units at Big Spring.

The Big Spring refinery continued to make good progress in improving its operations, and we expect our reliability investment to serve us well into the future. After these Q1 outages, we look forward to a cleaner runway into the summer driving season. Now, I would like to discuss our some-of-the-past strategy. We continue to make progress towards our midstream deconsolidation goal. This week, we have announced another intercompany transaction. The transaction further increased third-party cash flow at DKL to around 80%. The transactions also improved financial liquidity at DK by around $250 million, which will allow us to maintain our balance sheet strength. DKL's two water acquisitions are performing well, and along with the new gas processing plant, we will support DKL cash flow and distribution growth. DKL has a strong runway of growth in its gas processing business, led by its prime location in Lea County, New Mexico.

DKL is also enhancing its position by being one of the few midstream companies with sour gas gathering and acid gas injection capabilities. These steps highlight DKL's progress in becoming an attractive, high-growth, mid-size midstream company, benefiting from the natural gas growth in the Permian Basin. Delek Logistics is also on track to meet its strong 2025 EBITDA guidance of $480-$520 million. Despite these great moves, DKL remains undervalued compared to its peers, with minimal, if any, of this value reflected in DK shares. We will continue to take additional steps such that the value of approximately $400 million in third-party EBITDA at DKL is fully reflected in DK share price and DKL unit price. We remain confident that we will complete the DKL deconsolidation in a methodical manner that will create value for both DK shareholders and DKL unit holders.

I'm also excited about the progress we are making on our enterprise optimization plan, or EOP. As a reminder, we started EOP with an aim to improve DK cash flow by $80 million-$120 million, starting in the second half of 2025. On our last earnings call, we announced that we expect to be closer to the top end of the original cash flow improvement guidance. We remain confident in achieving at least $120 million in cash flow improvement through EOP annually. The final piece of our strategy is being shareholder-friendly and having a strong balance sheet. During the quarter, we paid $16 million in dividend and bought back $32 million of our shares. Our strong balance sheet, improved reliability, and confidence in EOP have allowed us to do counter-cyclical buyback in the first quarter. We remain committed to a disciplined and balanced approach to capital allocation.

Now, I would like to make a comment about small refinery exemptions. As you know, last year, the D.C. Circuit Court overturned the EPA denial of our SRE petition. We're excited about the support of domestic energy production by both the current administration and EPA. We are confident that the EPA, under the leadership of President Trump, will provide needed support to small refineries by granting exemption under RFS. In closing, I would like to thank our entire team for their hard work and dedication. We are excited about the prospects of DK in 2025 and beyond. Now, I will turn the call over to Joseph, who will provide additional color on our operations.

Joseph Israel (EVP Operations)

Thank you, Avigal. In the first quarter, we performed our planned outages, and our system is well-positioned for the gasoline season. In addition, EOP initiatives are on track to achieve approximately $80 million of incremental capture in refining process and commercial footprint by mid-year. In Tyler, the team successfully executed our planned maintenance in the alkylation unit, including the upgrade scope, which allows us to increase production of high-value products by approximately 500 barrels per day. Total throughput in the first quarter was approximately 69,000 barrels per day. Production margin in the quarter was $7.82 per barrel, including an unfavorable $0.70 per barrel impact from the planned ALKI outage. Operating expenses were $5.69 per barrel. For the second quarter, our estimated total throughput in Tyler is in the 73,000-77,000 barrels per day range.

In El Dorado, total throughput in the first quarter was approximately 76,000 barrels per day. Our production margin was $3.83 per barrel, and operating expenses were $5.16 per barrel. Planned throughput for the second quarter is in the 80,000-84,000 barrels per day range. The El Dorado system is one of our top operational EOP priorities. In the first quarter, we achieved approximately $0.80 per barrel of improvements, which is in line with our $2 per barrel run rate target. In Big Spring, the team executed well on our planned catalyst replacement work in the reformer and diesel hydrotreater, and total throughput was consistent with the guidance range at approximately 59,000 barrels per day. Our production margin was $4.86 per barrel, including an unfavorable $1.70 per barrel impact of the planned outage.

Operating expenses were $8.36 per barrel, reflecting the maintenance activities and the relatively low throughput denominator. In the second quarter, estimated throughput is in the 67,000-71,000 barrels per day range. In Krotz Springs, we continue to demonstrate improved capacity and performance capabilities since turnaround completion late last year. Total throughput in the first quarter was approximately 85,000 barrels per day, which is a record high rate for the plant. Our production margin was $6.40 per barrel, and operating expenses in the quarter were $5.36 per barrel. Our planned throughput for the second quarter is in the 82-86 thousand barrels per day range. Our implied system throughput target for the second quarter is in the 302,000-318,000 barrels per day range. Moving on to the commercial front, in the first quarter, supply and marketing contributed a loss of $23.7 million.

Of that, approximately $8.7 million loss was generated by wholesale marketing, and a negative $8.5 million contribution was generated by asphalt, both driven by seasonal low-demand trends. $6.4 million loss was attributed to supply. In summary, we continue to execute well on the fundamentals of our business. Our focus on EOP allows us to capture structural liquid yield, product mix, and cost structure improvements as we optimize our marketing footprint. Considering the constructive market conditions and our assets positioning, we are excited about the opportunities ahead of us, short and long term. Mark will now address the financial variance.

Mark Hobbs (EVP and CFO)

Thank you, Joseph. Referring to slide 18, for the first quarter, Delek had a net loss of $173 million, or negative $2.78 per share. Adjusted net loss was $144 million, or negative $2.32 per share, and adjusted EBITDA was $26.5 million. On slide 19, the waterfall of adjusted EBITDA from the fourth quarter of 2024 to the first quarter of 2025 shows that there were two main drivers for the increase in EBITDA. First, a $42.2 million increase in refining was primarily attributable to a higher margin environment in the first quarter relative to the fourth quarter, along with sequentially higher throughputs. Second, in the logistics segment, we continue to have another strong quarter delivering $117 million in adjusted EBITDA, a $9 million increase over our previous record of quarterly adjusted EBITDA.

These improvements were mitigated by slightly higher costs in the corporate segment of approximately $1.8 million compared to the prior period. Moving to slide 20 to discuss cash flow. Cash flow from operations was a use of $62 million. Within this amount is our net loss for the period, in addition to an inflow of approximately $26 million of timing-related working capital movements, which include the impacts of the inventory intermediation agreement. Investing activities of $315 million includes approximately $180 million paid at the closing of the Gravity acquisition and PP&E additions of $136 million. Financing activities of $265 million reflects $32 million in share repurchases, $16 million in dividend payments, and $22 million in DKL distribution payments to public unit holders. Along with share repurchases, this quarter, DK agreed to sell $10 million worth of DKL units back to DKL under the DKL $150 million unit repurchase program.

As mentioned previously, this is a tax-efficient way for DK to proceed with its deconsolidation efforts. On slide 21, we show our actual progress under the 2025 capital program. First quarter capital expenditures were $133 million. Approximately $72 million of the spend was in the logistics segment, of which $52 million was associated with the construction of the Libbey 2 gas plant, which remains on track from a cost and time perspective and is currently under the commissioning phase. Primarily, all of the remaining capital spend during the quarter was in the refining segment, addressing planned sustaining capital initiatives. Our DK refining and corporate capital spending outlook for 2025 remains consistent with prior guidance. Our net debt position is broken out between Delek and Delek Logistics on slide 22.

During the quarter, we drew approximately $112 million of cash, primarily to return approximately $48 million to shareholders for capital expenditures on growth projects and for the acquisition of Gravity. Moving now to slide 23, where we cover second quarter outlook items. In addition to the guidance Joseph provided, for the second quarter of 2025, we expect operating expenses to be between $215 million and $225 million. Operating expenses are based on higher throughput expected for the second quarter, so although in line with first quarter results, we are expecting improvements on a per barrel basis. G&A is expected to be between $52 million and $57 million, D&A to be between $95 million and $105 million, and net interest expense to be between $80 million and $90 million. With that, we will now open the call for questions.

Operator (participant)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We do request for today's session that you please limit yourself to one question and one follow-up. Your first question comes from the line of Alexis Patrick of Goldman Sachs. Your line is open.

Alexis Patrick (Analyst)

Hey, good morning, team, and thank you for taking my question. I wanted to talk about.

Robert Wright (SVP)

Absolutely. Good morning.

Alexis Patrick (Analyst)

Good morning. I wanted to talk about DKL and the full year EBITDA guidance, which you reiterated. Can you talk about some of the moving pieces there, and then how should we think about changes in Permian activity potentially impacting the outlook?

Avigal Soreq (CEO)

Yeah, absolutely. I will start with the Permian activity, and then we'll talk about the great news that we are seeing on DKL. In terms of the Permian activity, we can divide that into three buckets, right? Bucket number one is Midland, which is more mature acreage, but with great activity and a great producer, a mature producer over there. The big thing that we have over there is that we have a very strong combined offer with the water, and those acquisitions are going to the high end of our expectations. Over there, with all the discussion we had with our producer, we are very secured and have a very nice volume. That's one. The second part is the Delaware.

Delaware, as you know better than I do, has the lowest break-even of a shell in any place, and we are in a very good position over there. We have volume that we did not produce until we are finishing the expansion of the plant, so that is a very easy move for us to fill up the plant, and we are on very solid ground over there with what we are discussing with all of our producers. When everyone is scared, actually, we see great opportunities. On the Delaware, as you well know, we also have a sour offering, which is very unique, and no one else almost in our area has that to offer to our producers. We are in very good shape with both of that.

That's the reason we reiterate the guidance we gave, and we are looking on a very strong year for DKL and more to come.

Alexis Patrick (Analyst)

That's very helpful. Thank you. My follow-up is just on capital returns. Can you talk about your strategy there? How should we be thinking about the sustainability of the current dividend yield, and then how are you thinking about share repurchases and balancing share price and deleveraging efforts?

Avigal Soreq (CEO)

Yeah, yeah, absolutely. I want to start with the bigger picture with your permission. We started almost a year ago, I want to say, the EOP enterprise optimization plan. The whole point of that is free cash flow. Free cash flow is king, and we are showing improvement, and we have a very good second half with minimal capital, and that's the whole point of free cash flow. I want to make it very clear. Today, as you saw in the announcement, we said at least $120 million improvement on an annual basis second half, and we have a very nice project. Again, I'm saying that more news to come around that in the near future, we are very excited around where we are with that project. As you know, EOP is not only cost, but it's also margin.

You saw a very good G&A number going down. We put you a slide that basically started with 100, and we basically, it's now at 50, low 50s. You saw the OPEX coming along very nicely to guidance, even though we are adding more and more activities to the business. We are adding another natural gas plant. We just added another acquisition, Gravity, that we did, and we are having a higher throughput. All of that is coming to the right direction with the entire team coming behind that. You have seen the El Dorado capture rate going up almost a pack on the top of the Krotz Springs improvement, so that's very good.

In terms of capital allocation, to your point, we said before the cycle started that buyback, before that, dividend for us is something that we want to do through the cycle, and that is exactly what we are doing. We have a balanced approach between buyback and improving our balance sheet. That is exactly what we are doing. We see a huge, huge, huge amount of value in our share price. For us, return to shareholder is not one quarter campaign. It is a philosophy, and we are following through. We did the buyback in all the previous quarters, and we are very, our level of conviction and the amount of discount of our share price is just huge, does not allow us not to act.

Operator (participant)

Thank you. Your next question comes from the line of Matthew Blair of TPH. Your line is open.

Matthew Blair (Analyst)

Thank you, and good morning. Supply and marketing showed some improvement in the first quarter relative to the fourth quarter. You talked about some of the drivers there, but I was hoping you could talk a little bit about how things are trending in the second quarter. Should we expect further improvements in the wholesale marketing and asphalt categories? Thank you.

Avigal Soreq (CEO)

Yeah, absolutely. Matthew, absolutely right about your observation. It's a move $10 million on a similar market on the wholesale price and even worse market on the asphalt. That actually even makes the position even better. In terms of our rack, we see strong rack demand. We've seen NetBeck going in the right direction. We've seen Krotz Springs going $3-$4 in the last few weeks. All of that are very positive in terms of the reaction of supply demand, and we are very positive about where we are and about Q2. That's all going in the right direction. We're in a good position, market going well, and we see some more to come around that.

Mohit Bhardwaj (Executive)

Hey, Matt, this is Mohit. I'll just add a little bit on that. As Avigal said, Q4, we always talk about our supply and marketing line item in three terms: wholesale, asphalt, and supply. Wholesale conditions were very similar in the group versus Q4 and asphalt. Q1 is the seasonally weakest quarter for asphalt. Despite that, EOP is a big thing in the organization, and we are doing all the structural things that make us better, and that's why you saw that $10 million improvement. As far as go forward guidance is concerned, we do not really provide guidance, but we have seen a very strong start to the group differentials in the second quarter, and asphalt has been improving as well. That is how the quarter has started, but we will see where we end up at the end of the quarter.

The things look really good so far.

Matthew Blair (Analyst)

Sounds good. I was hoping you could discuss some of the dynamics in the Southwest. It seems like it's off to a little bit of a sluggish start with both gasoline and diesel cracks below five-year averages. Has anything structurally changed on the Southwest, and would you expect to see improvements into the summer here?

Mohit Bhardwaj (Executive)

Matt, this is Mohit again. I think Southwest, we are actually seeing very strong cracks. If you look at some of the problems that we have seen on the West Coast, it's translating into Arizona markets, especially AZRBOB, which is a gasoline grade for Arizona markets, has been very, very strong. We supply that market, and we are not seeing any weakness that you're talking about.

Operator (participant)

Thank you. Your next question comes from the line of Manav Gupta of UBS. Your line is open.

Avigal Soreq (CEO)

Hey, Manav. Good morning, Manav.

Manav Gupta (Analyst)

Good morning, sir. My question here is a little more on the SREs, and obviously, your knowledge is vastly higher than ours. I'm just trying to understand here, when we are talking SREs, are we talking SREs on a go forward basis, or you also might actually would like to go back and claim SREs for a period of 2020 or 2020 whatever time frame? I'm just trying to understand, is it all going to be forward-looking, or you're also going for what you believe could be retroactive SREs for you guys?

Avigal Soreq (CEO)

Yeah, our comment that we put is retroactive, and it's going to go to a backlog all the way from 2019. I think if you look on the previous posting that we gave, we gave a rounding number around it. For us, it's a huge value. As I said on my prepared remark, we are very optimistic about that and more news to come. It's both backward and forward.

Manav Gupta (Analyst)

Okay, so both backward and forward. Forward also, even if RVO is raised materially and the rent prices do move higher, you still expect those SREs to give you relief. Is that the right way to think about it?

Avigal Soreq (CEO)

Yes, absolutely.

Mohit Bhardwaj (Executive)

Manav, this is Mohit. Thanks for the question. Let me just give you all the details around that. After the DC Circuit Court ruling last year, our petitions for SREs were sent back to the EPA. The total amount, as we disclosed in the past, to comply with those petitions was close to $300 million, and that is for the years of 2019 and 2020. From 2021, 2022, 2023, and 2024, the cost of our compliance is way above our current market cap. First of all, we obviously are putting forward and talking with the EPA to get the retroactive SREs, and we obviously, as the law clearly states, that we deserve SREs. 100% of our capacity deserves SREs, so we also are looking from a forward basis.

That is the situation right now, and we do think there are competing incentives that EPA has to balance, but as far as we are concerned, we are very optimistic that EPA will grant us the SREs that we deserve under the RFS law.

Manav Gupta (Analyst)

Thank you, guys. I'll turn it over.

Avigal Soreq (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Doug Legate of Wolfe Research. Your line is open.

Hi, good morning, everyone. This is McKinley for Doug Legate. He is currently traveling. My first question is going to be centered around the EOP. You guys touched on it earlier. It appears that you're going to fairly comfortably reach your $120 million target heading into the second half of the year, but my question is, are there any opportunities for upside beyond that $120 million, and if so, what are the potential drivers of further improving upon that target?

Avigal Soreq (CEO)

Yeah, you picked it right, you picked it nice. The answer is absolutely, we have not gathered guidance over the 120, but do not be surprised if that guidance will come at some point because we do see upside on the top of that. The answer is there is some, you picked it, what we try to hand the market very nicely. Kudos to you. We are working towards that. The entire organization is focusing on that and more to come.

Great, thank you. My follow-up is also generally centered around the EOP. Do you have a kind of a guide or an idea of how or if the refining business can generate sustainable free cash flow on that turnaround expenses post? You recognize in all your cost savings from the EOP? Thanks.

Yeah, yes, absolutely. First of all, you need to understand that we are very confident in the EOP, and that is what looks great. We gave you numbers, and you have seen the numbers around the improvement that you already see in El Dorado. You see the improvement that we see in the cost basis. You see the improvement that we showed in Krotz Springs. You see the improvement in reliability in Big Spring, and you see Tyler in a very good, comfortable spot. I will let Mark, our CFO, say a few words about the cash flow going forward, and that is going to give you another level of understanding.

Yeah, thanks, Avigal. Speaking about cash flow and digging in a little bit more over recent past and the quarter, keep in mind that over 80% of our capital spend in the first quarter was for highly accretive growth, primarily at DKL, that furthers our sum of the parts initiatives. As you know, we closed the Gravity acquisition on January 2. That was about $180 million just over of cash in the quarter. In 2025, CapEx, as we've provided guidance, is heavily weighted to the first half of the year. In the first quarter, we spent about $72 million in growth CapEx at DKL, $52 million of which was for our Libbey 2 expansion. We also had planned maintenance at both Big Spring and Tyler, and our plants are running well, so we feel very good about being set up for moving into the summer driving season.

If you take a longer-term view and think about the relatively heavy spend that we had over the last nine months, which included the KSR turnaround late last year, the ongoing Libbey 2 expansion, which is critically important for our Delaware growth initiatives around gas and sour gas, plus acquiring both H2O and Gravity in the face of challenging margin environments, we've maintained a strong balance sheet, and we're very happy with our liquidity position as we move into the year. This also incorporates the fact that we've continued our countercyclical approach to buybacks. Over that period of time, we purchased approximately $75 million of our stock along with paying around $50 million in dividends. We are set up very well as we move through 2025.

I mean, the EOP initiatives that Avigal has given a lot of detail around moving through the second half of the year, we're very comfortable with $120 million plus in improvement. That's very much a free cash flow initiative. With a limited capital spend in the second half of the year, we feel very good about how we're set up going forward.

All right. Thanks for your response. Thank you for taking my questions.

Thank you.

Operator (participant)

Your next question comes from the line of Joe Laetsch of Morgan Stanley. Your line is open.

Joe Laetsch (Analyst)

Hey, good morning, team, and thanks for taking my questions.

Avigal Soreq (CEO)

Hey, good morning, team.

Joe Laetsch (Analyst)

Good morning. I wanted to ask on some of the parts progress, and I was hoping you could unpack the intercompany transactions. Is there more to go on this side, or are the right assets in the right buckets now? Thanks.

Avigal Soreq (CEO)

Yeah, absolutely. Some of the parts, along with EOP, are the most important initiative in our company. I want to make it very, very clear. Deconsolidation is the goal, and deconsolidation is happening as we speak, just to make it very, very clear. As you, Joe, know and see every day, we went from 79% just a year ago, more or less, to just lower 60% now. While doing that, we increased the DKL EBITDA from $385 million to midpoint of $500 million. While doing that, we increased third party from around 40% to around 80% as we see today. While doing that, we increased the distribution that DK actually gets. All of that is a very creative, agile way to achieve some of the part and achieving value for both DK shareholder and DKL unit holder. That is the objective.

I will let Mark add more into the transaction that we disclosed today because it's very important.

Mark Hobbs (EVP and CFO)

Yeah, Joe. The intercompany transactions, which we announced coinciding with the earnings, it's really about cleaning up contracts between DK and DKL. It's a critically important step to advancing our deconsolidation efforts because, as Avigal said, it's kind of getting assets and activities in the right place. What we've done is we've basically moved refining-related activities from DKL back to DK, which is obviously important. We also moved midstream-related activities from DK down to DKL through the cleaning up of these contracts. The overall net impact of this is not really material to either one of the entities, but through this restructuring, it does unlock approximately $250 million of availability, as we mentioned, under our credit facilities. Importantly, the results of this increase DKL's third-party EBITDA contribution to approximately 80% on a pro forma basis.

That further drives our economic separation between the two companies, which is also critically important.

Joe Laetsch (Analyst)

Great, thanks. It's helpful. I want to follow up on the logistics side. You've done a good job growing midstream through bolt-ons. Could you talk about what you're seeing in the M&A landscape today, and has that changed at all with the pullback in crude and some E&P starting to reduce activity here? Thank you.

Avigal Soreq (CEO)

Yeah, absolutely. We are developing a company which is a mid-size, midstream company that provides all services: crude, gas, and water. Looking on M&A specifically, we are not going to comment. We have done in the past deal that made a lot of sense for you guys and made a lot of sense for us. The three main criteria that we are looking: free cash flow, accretive to leverage, and accretive to coverage ratio. We are not after the deal. We are after providing value to unit holder and shareholder. That is the goal. We are picking the right tool at the right time. We can either sell like we sold retail. We can either buy like we did with Gravity and H2O, or we can build when we have the right multiply to build versus buy.

We have the full toolkit ahead of us, and we are trying to use the right toolkit for the right mission and not to confuse them. That is the goal. The goal is to give value to investors, and that is what we are determined to do.

Joe Laetsch (Analyst)

Great, thanks.

Operator (participant)

Your next question comes from the line of Ryan Todd of Piper Sandler. Your line is open.

Ryan Todd (Analyst)

Great, thanks. Maybe first off, congratulations on the improved margin capture, particularly at El Dorado. Can you talk about what you've been able to do to drive improvement there, and what are the next steps in terms of continuing to improve capture?

Avigal Soreq (CEO)

Yeah, absolutely. El Dorado is a very nice kit. We visited there just a few weeks ago, all the refineries behind the EOP initiative, and we definitely see great progress. The complexity of the refinery is good. We finished the journey of operation, and I will let Joseph, that is very close to that, comment around that. Please, Joseph.

Joseph Israel (EVP Operations)

Yeah, going from our fourth quarter to the first quarter, realized the gross margin improved by $1 over a benchmark crack spreads. We went up $3.27 versus what the market gave us of $2.38, meaning the EOP initiatives are starting to really impact our capture. We saw $0.80 per barrel in place in the first quarter, like we mentioned in our prepared remarks, and we are on track to achieve the $2 per barrel annual rate by the end of this quarter. To remind everyone, these are structural process logistics and commercial improvements which will support El Dorado profitability in the long run through the cycles. If you're asking in specific, we are talking about jet fuel production, which we added in El Dorado and really helps the offering of high-value products, plus the ability to leave more products in the local market area.

We have some catalyst change, which is really helping our liquid yield and performance of some of our units and other creative engineering techniques that we implemented. El Dorado is supposed to generate $50 million of incremental value by the time it is all said and done in those three fronts. Very happy with the progress and the results.

Ryan Todd (Analyst)

Great, thank you. Maybe a follow-up on an earlier question. There have been a lot of moving pieces over the last few quarters across your business that impact, I think, how we view the financials. Refining business has certainly seen some improvement, but I think if we go back, I believe it was last August when you had made a number of these structural changes. There was part of the Amend and Extend program. I think maybe you were talking about something on the order of $60 million of EBITDA that would kind of move from DKL towards DK. You've announced some additional kind of intercompany adjustments here. Can we look at Q1 earnings, the results here? Does it reflect kind of a normalized run rate in terms of these intercompany adjustments and the Amend and Extend from last year?

Is that generally reflected in the first quarter underlying kind of profitability, or is there more to go there outside of the EOP?

Avigal Soreq (CEO)

Yeah, for the most part, that's not the changes that we see. For the most part, it's the business that we are improving and making that better. That's not the essence. Those deals are more towards the back. I will let Mohit, that was very close to that, answer.

Mohit Bhardwaj (Executive)

Yeah, so as far as these intercompany agreements are concerned, let's just talk about the first one that we just announced. The basic idea here is to just put the right assets under the right buckets. We're just making sure all the DKL-tied assets are at DKL, and all the refining-tied assets are coming back, or at least economically coming back to Delek. For the latest round of intercompany transactions, we basically expect EBITDA impact to be relatively muted for DKL and for DK. As far as the Amend and Extend contracts that we announced in August of last year, we still expect some of that $60 million to come back to DK progressively throughout this year.

Ryan Todd (Analyst)

Great, thank you.

Operator (participant)

Your next question comes from the line of Jason Gabelman of TD Cowen. Your line is open.

Jason Gabelman (Analyst)

Yeah, hey, morning. Thanks for taking my questions.

Avigal Soreq (CEO)

Hey, Jason, good morning. How are you?

Jason Gabelman (Analyst)

Yeah, good. I was a bit surprised by the OPEX guidance going forward in light of kind of declining turnaround activity. If I compare to where you were the back half of last year on a consolidated basis, you were about $185 million, and 2Q, you're guiding to $220 million. I think 3Q 2024 throughput was flat with 2Q 2025 guidance, so I would have anticipated that to be a good kind of benchmark. Understanding higher logistics OPEX adds $10 million, higher natural gas prices probably add another $10 million. There's still a decent, maybe call it $15 million gap to where we think you should be on OPEX. Is there anything going on in that bucket that we should be thinking about in terms of increases from the second half of the year to the go-forward guidance?

Avigal Soreq (CEO)

Yeah, thanks for the question. A great question, and I'm happy to answer. The main driver of OPEX between Q1 and Q2 are simple. It's the natural gas plant that we are adding. I think back of the envelope is like more than 30,000 barrels a day of throughput that you probably noticed that we are giving a very strong guidance towards Q2. All of them are very important, and we are doing that. We are very happy that we have the opportunity to make more money on an overall basis. The last thing that you need to expect is that we will see further improvement on the OPEX going to the balance of the year, Q3 and Q4. We are very happy about the progress we are doing about OPEX.

You have seen that we came below the target we gave, and we've seen a very nice improvement. You probably have noticed that the G&A is pretty much half versus when we started that program. We are making very good progress. We have activity we are adding. We have throughput we are adding, and you'll hear more news shortly.

Jason Gabelman (Analyst)

Yeah, and I hear you on the G&A side for sure. That's coming through. Do you have a sense of where OPEX should kind of trend in the second half of the year?

Avigal Soreq (CEO)

I don't think it's the best practice to give guidance so far out, but we are very optimistic.

Jason Gabelman (Analyst)

Okay, that was it for me. I appreciate the help there. Thanks.

Avigal Soreq (CEO)

Appreciate the question.

Operator (participant)

That concludes our Q&A session. I'll now turn the conference back over to Avigal Soreq for closing remarks.

Avigal Soreq (CEO)

Yeah, absolutely. I would like to thank the management here around the table, to our board of directors, to our investors, and most importantly, our great employees that make this company what it is. We will talk again next quarter. Thank you.

Operator (participant)

This concludes today's conference call. You may now disconnect.