Delek Logistics Partners - Q1 2024

Transcript

Operator (participant)

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners first quarter 2024 earnings conference 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'd like to ask a question during this time, simply press Star, then the number one on your telephone keypad. If you would like to withdraw your question, press Star one again. I would now like to turn the conference over to Rosy Zuklic, Vice President, Investor Relations. Please go ahead.

Rosy Zuklic (VP of Investor Relations)

Good morning, and welcome to the Delek Logistics Partners first quarter earnings conference call. Participants on today's call will include Avigal Soreq, President; Joseph Israel, EVP Operations; Reuven Spiegel, EVP and Chief Financial Officer; and Odely Sakazi, SVP, Delek Logistics. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including, without limitation, statements regarding guidance and future business outlook. These statements involve risks and uncertainties that may cause actual results to differ from our forecast. For more information, please refer to the risk factors discussed in the Partnership's most recently filed annual report on Form 10-K and quarterly report on Form 10-Q, filed with the SEC, along with the press release associated with this call. The Partnership assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

I'll now turn the call over to Avigal for opening remarks. Avigal?

Avigal Soreq (President)

Thank you, Rosy. Delek Logistics Partners reported a strong first quarter. We once again exceeded $100 million of quarterly EBITDA. I'm pleased with our consistent performance. We saw continued strong performance from our Midland gathering operation, and our operation in the Delaware basins have started to exceed our expectations on a consistent basis. This validates our strong position in the Permian Basin. We have come a long way with DKL. Delek Logistics started back in 2012 as a classic drop-down story. It has evolved into something bigger. We started to develop third-party business back in 2016, focusing in the Midland and the Delaware basins. Today, approximately 50% of our EBITDA is from third-party business. Our growth efforts have been focused on Gathering and Processing segment. Our Midland Gathering System is premier asset in the heart of the Midland Basin. We built this system organically.

It's now gathered up to 230,000 barrels per day and has around 350,000 of dedicated acreage contracted until 2030. It's an attractive asset that provides the growth engine of our Midland midstream operation. Moving to the Delaware gathering business. We built this business inorganically and organically. The system provides complete crude, gas, and water gathering to our customers. We have significant growth opportunities in our system. On a capital structure, we improved Delek Logistics' financial strength and flexibility. Reuven will speak to this. The debt and equity offering improved our liquidity to approximately $800 million. I'm proud of the team for their successfully executing these transactions. In May, the board approved the 45th consecutive increase in the quarterly distribution to $1.07 per unit.

Delek Logistics has shown strong track record of delivering value to our unit holders. We feel confident in our ability to maintain strong distribution to our investors. I will now hand it over to Reuven.

Reuven Spiegel (EVP and CFO)

Thank you, Avigal. Before I start the financial highlights, I wanted to give a little color on the recent debt and equity offerings. The combination of the primary equity issuance and extending our debt to 2029 improved Delek Logistics ability to pursue its growth plans through improved leverage and financial liquidity. It also increased float in the units, attracting new investors and increasing the daily volume traded. As Avigal mentioned, we increased liquidity to approximately $800 million. This was about $300 million prior to these transactions. In addition, we reduced the leverage ratio to 4.01 from 4.34 last quarter. We see a pathway to continued improvement in the leverage ratio through the balance of the year. Moving on to the quarter results.

The first quarter EBITDA was $101.5 million, compared to $93.2 million in the same period of 2023. Distributable cash flow was $68 million, and the DCF coverage ratio was 1.35x. For the Gathering and Processing segment, EBITDA for the quarter was $57.8 million, compared to $55.4 million in the first quarter of 2023. The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets. Wholesale Marketing and Terminalling EBITDA in the first quarter was $25.3 million, compared with $22 million in the prior year. The increase was primarily from higher terminalling utilization. Storage and Transportation EBITDA in the quarter was $18.1 million, compared with $13.4 million in the first quarter of 2023. The increase was mainly driven by higher Storage and Transportation rates.

...And lastly, the Investment in Pipeline Joint Ventures segment contributed $8.5 million in this quarter, compared with $6.3 million in the first quarter of 2023. Moving on to capital expenditures. The capital program for the first quarter of 2024 was $15 million. Most of the spend in the quarter was for growth projects, namely advancing new connections in the Midland and Delaware gathering systems. With that, we can open the call for questions.

Operator (participant)

We will now begin the question-and-answer session. Our first question will come from the line of Doug Irwin with Citigroup. Please go ahead.

Doug Irwin (Equity Research Analyst)

Hi, thanks for the question. I just wanted to start with the recent offerings. Can you maybe provide a little bit more context just into the decision to issue DKL equity, and then maybe if you could just talk to the flexibility and some of the growth opportunities that this increased liquidity might allow going forward? And then just to follow up on that, as you kind of recently issued another shelf offering, are there any plans to issue more equity going forward, or are you kind of comfortable with where the balance sheet is today?

Avigal Soreq (President)

Yeah. Thank you, Doug. It's Avigal. I will start, and then Reuven can add more color into that. So our offering that Reuven and his team did actually checks all the boxes that we need. It's improving the leverage ratio, improving availability, and get more float on the public unit. So it checks many boxes to enhance the great activity that we have on the operation side. So it's a complementary action to the operation side to enhance the equity side and the balance sheet side. On the shelf offering that we have, obviously, that's a best practice to have a good chunk of a offering for many reasons. Reuven, I don't know if you wanna add a few words into that.

Odely Sakazi (SVP)

Yeah, the equity offering actually has a history. On June 30, 2022, we closed on 3Bear, and we communicated back then to the market that we intend to finance the acquisition by $400 million of high yield and $200 million of equity issuance. However, both high yield market and the equity issuance were shut down at the time, and we had to be patient and look for the right time and the right opportunity, which we found in the last equity issuance. Given that it was the first one, we couldn't go all the way to $200 million, but I think we're happy with the outcome of the first one. And I think going forward, we'll just be opportunistic about it.

Doug Irwin (Equity Research Analyst)

Great. That's some helpful context around 3Bear. And then just as a follow-up, maybe pivoting to the growth outlook, could you maybe just talk about the, the opportunities that you're seeing for the G&P business moving forward, as growth may be geared more towards the Delaware or the Midland? And then maybe if you could just talk about how you're thinking about organic growth versus maybe the opportunity to do some additional acquisitions moving forward.

Avigal Soreq (President)

Yeah, Doug, that's another great question. I will start, and then I will let Odely finish the answer. So it's easier to talk about the past versus the future, for obvious reasons, but I think that we demonstrate to the market that we actually know to do both ways, inorganically and organically. We demonstrate that the DPG assets in the Permian Basin can be very attractive, and we developed that over time to something we are really proud of. And we also developed the Delaware asset and exceeded our expectations as well. So we have a good track record.

We are in a point that we are aggressive around it, but we always want to make sure that whatever we are doing is attractive to both the DKL unit holder, but also to our shareholders all across. Odely, please.

Odely Sakazi (SVP)

Yeah. Thank you, Avigal, and good to hear from you today, Odely. As Avigal mentioned, I think that on the inorganic, we're always opportunistic and always look on opportunity, and we want to continue to do that. And obviously, it has to be something that makes sense and also accretive for us. So we always gonna continue to look at that. On the organic side, definitely, as you know, both the Delaware and also the Midland are both of the location where we continue to put capital in, and we see a significant opportunity from a growth opportunity standpoint. Specifically on the Delaware, we feel that there is a needed infrastructure pretty much in all lines on the water side, the gas, and the crude.

We're able to execute that across the board in all our segments in the Delaware side on our DDG, and we see from our producer the continued need, specifically in the location where we have our current acreage with the 3Bear former acquisition, to continue to focus on that location on all three streams. I think this is an area where it's very needed for continued growth, that we're definitely gonna continue to look on organic opportunity in all streams.

Doug Irwin (Equity Research Analyst)

Great. That's helpful. Thanks for your time.

Odely Sakazi (SVP)

Absolutely.

Avigal Soreq (President)

Doug, thank you. Thank you for your support.

Operator (participant)

Your next question will come from the line of Neal Dingman with Truist Securities. Please go ahead.

Neal Dingmann (Managing Director of Energy Research)

Good morning, guys. Maybe just talk about your MVC contracts. Any update, particularly on Tyler or El Dorado? And then just again, just how the other sort of you're looking at other contracts, are you continuing to try to extend the duration, or where do you sit with most of these other, you know, maybe prospective MVC contracts?

Avigal Soreq (President)

Yeah. So, Neil, the intent of DKL is to renew this contract, and that's something that DKL is working at.

Neal Dingmann (Managing Director of Energy Research)

Is there any timeline for the Tyler or El Dorado negotiations?

Avigal Soreq (President)

... So obviously, that require the conflicts committees between DK and DKL. So, this is a process, but you understand the intention.

Neal Dingmann (Managing Director of Energy Research)

Sure. Okay. And then, just lastly, kind of built onto the prior question, what kind of opportunities up by 3Bear you seem to be advancing up there? Are there opportunities to, you know, bolt on some assets? I mean, or I guess maybe ask—Let me ask it another way. Is there any need to bolt on any assets, do you believe, up there? And, you know, sort of what are you doing to boost the margins in that area?

Avigal Soreq (President)

I'm not going to talk about the margin. The margin is where the margin is, in this area. What I can speak, that we see a significant growth and opportunities in the area, and we will elect to do something that's going to be accretive to our unit holders. We see the demand for the service that we know how to provide. Obviously, as I said before, we know to provide in the area crude, gas, and water. That's a pretty unique value proposition. Our infrastructure in the area is in a unique strategic location. So if we see something which is synergetic and make a lot of sense with the current offering we have and the physical asset, we'll not hesitate to do something, as long as it's accretive to, unit holders.

Neal Dingmann (Managing Director of Energy Research)

Great to hear, guys. I think that's the right strategy. Thank you.

Operator (participant)

We have no further questions at this time. I will now hand the call back to Avigal for closing remarks.

Avigal Soreq (President)

Thank you. I want to thank our employees for their commitment and hard work. I want to thank to our unit holder for their trust and interest in our partnership. I want to thank to our customer for trusting in us, and I want to thank to our Board of Directors for their continuous support. And we'll talk next in the next quarter. Thank you.

Operator (participant)

This will conclude our call today. Thank you all for joining. You may now disconnect.