Delek Logistics Partners - Q2 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Jael, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners Q2 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 now like to turn the conference over to Robert Wright, Deputy CFO. You may begin.

Robert Wright (Analyst)

Good morning, and welcome to the Delek Logistics Partners Second Quarter Earnings Conference Call. Participants joining me on today's call will include Avigal Sorek, 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 statements regarding guidance and future business outlooks. 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. I will now turn the call over to Avigal for opening remarks. Avigal?

Avigal Soreq (CEO)

Thank you, Robert. Delek Logistics Partners had another record quarter. We reported $102.4 million quarterly Adjusted EBITDA. I am pleased with our continued performance. We have made several announcements today. DKL is a premier full-service crude, water and natural gas provider in the prolific Permian Basin, and the transaction we have announced today will significantly enhance our position. First, let's talk about the contract between DKL, DK, and Wink to Webster Pipeline. We announced an amend and extend of the contract between DKL and DK. The extensions remove an overhang on the DKL unit. It moves away from a month-to-month to contract terms of up to seven years. These amendments allow us to acquire DK's interest in the W2W pipeline without significant strain on our balance sheet. W2W is a premier crude oil pipeline backed by investment-grade counterparties.

It increases the overall asset quality at DKL and enhance DKL Permian position. The second DKL announcement today is the investment in a new gas processing plant. This plant is highly subscribed and is estimated to generate cash-on-cash returns of more than 20%. We are looking to complete the plant during the first half of 2025. The last transaction DKL announced today is the acquisition of H2O Midstream for $160 million of cash and $70 million preferred. The transaction is immediately accretive to DKL on an EBITDA and free cash flow basis. The acquired assets fit very well within DKL existing footprint. Assets further expand our capabilities to be comprehensive provider of midstream services in the Permian Basin.

Once this transaction is complete in the first half of 2025, a majority of DKL EBITDA will be from non-related parties, making DKL a mostly independent midstream company. In July, the board of directors approved an increase in the quarterly distribution to $1.09 per unit. Delek Logistics has shown a strong track record of delivering value to unit holders. We are excited about the announcement that we have made today and the opportunities ahead of us. I want to welcome the H2O team to the DKL family and wish them continued success and good luck. I will now hand it over to Reuven.

Reuven Spiegel (EVP and CFO)

Thank you, Avigal. As Avigal mentioned, we are growing Delek Logistics with a prudent management of liquidity and leverage. The liquidity we created in the beginning of the year has allowed us to carry out the transaction we have announced today. We are also managing our leverage, which has improved to 3.81x at the end of the second quarter of 2024, from its high point of 4.84x at the end of 2022 and 4.34x at the end of 2023. Moving on to our second quarter results. The second quarter Adjusted EBITDA was $102.4 million, compared to $92.8 million in the same period of 2023. Distributable Cash Flow was $68 million, and the DCF coverage ratio was 1.32x.

For the gathering and processing segment, EBITDA for the quarter was $54.7 million, compared to $52.6 million in the second quarter of 2023. The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets. Wholesale marketing and terminalling EBITDA was $30.2 million, compared to $28 million in the prior year. The increase was primarily from higher terminalling utilization. Storage and transportation EBITDA in the quarter was $16.8 million, compared to $15 million in the second quarter of 2023.

... The increase was mainly driven by higher storage and transportation rates. Lastly, the investment in pipeline joint venture segment contributed $7.9 million this quarter, compared to $7.3 million in the second quarter of 2023. Moving on to capital expenditures. The capital program for the second quarter of 2024 was $10.2 million. Most of the spend in the quarter was for growth projects, namely advancing new connections in the Midland Gathering System and Delaware Gathering System. Along with our previously announced capital budget for 2024, we expect to spend $90 million-$100 million in the second half of 2024 on new processing plant. With that, we can 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're called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Your first question comes from the line of Neal Dingmann of Truist Securities. Your line is open.

Neal Dingmann (Analyst)

Hi. Good afternoon, guys. Thanks for the time. My first question is just on the H2O Midstream acquisition, which looks very attractive. Just wondered, maybe could you talk a little bit about... You mentioned here about the new full suite of services, how that improves sort of opportunities. I'm just wondering how that will improve, you know, as you have future customer opportunities. And then secondly, you all talked about the potential near-term cost and revenue synergies. I'd love to hear maybe more about that.

Avigal Soreq (CEO)

Yeah, absolutely, Neal. So there are three aspects to that. One, the same customer, you can have a more comprehensive view about this, that you are doing with customer. The second point around it is that basically the operation are on the top of each other, so you can be very efficient on the way you run your operation. And the third, this infrastructure can be relevant for both services. So this is accretive, a very accretive deal for us, and it is extremely synergetic.

Neal Dingmann (Analyst)

No, I would agree. And then secondly, just on the new Delaware gas plant, what could the timing then, I know maybe jumping the gun a little bit on this one, but I like that there's, I think there is some future additional gas processing opportunities you all could have around there, you know, beginning next year after you close, and I'm just wondering, what, how soon could you see some of those future gas opportunities and, you know, what might that consist of?

Avigal Soreq (CEO)

Yeah, so, our gas plant is completely synergetic with the current gas plant we have. We said that we're gonna complete it the second, the first half of 2025, and it's already being nicely subscribed. Odely, I don't know if you want to add into that.

Odely Sakazi (SVP)

Yeah, just, just a little bit, and to your comment, Neal, to be honest, right now, we already have the associate need for additional capacity for what we're seeing with our producer currently and also going forward. So this is why we feel very comfortable on the volume on that new plant that is already highly subscribed, as Avigal mentioned. So we see that timing pretty much, as soon as possible from our stand.

Neal Dingmann (Analyst)

Great, guys. Nice additions on both sides. Thank you.

Avigal Soreq (CEO)

Good. Thank you.

Operator (participant)

Your next question comes from line of Doug Irwin of Citi. Your line is open.

Doug Irwin (Analyst)

Hi, thanks for the question. I just wanted to touch on the $55 million-$85 million EBITDA range you, you provided for the transactions this morning. Just wondering if you could talk about some of the assumptions for the, the high end versus the low end of that range. Is that mostly dependent on some of the H2O Midstream synergies, or there may be some other factors under consideration there? And then should we expect that to kind of be a good run rate for 2025, or is that ramping over time?

Avigal Soreq (CEO)

So the, so there are three main components around that, right? Like we outlined. One is the DK contract, amend and extend. Second is the W2W, and third is the H2O Midstream, and fourth is the gas processing plant. What I think the majority of that is not coming from synergies, it's coming from the base business. And we, and I think that a good estimation is to take the midpoint out of that. That's a good number to assume going forward.

Doug Irwin (Analyst)

Okay, great. That's helpful. And then I was just wondering if you could provide a little more detail around the funding expectations for the cash components of these transactions. And if I look at slide six in the presentation materials, it looks like maybe some units are changing hands here as part of the Wink to Webster and recontracting. Just wanted to clarify I'm interpreting that correctly, and if so, maybe get a little more detail around how that might play into the deconsolidation priorities of the DK.

Avigal Soreq (CEO)

Yeah, absolutely. So there are units that are changing hands, but the net amount is not big between the companies, so it's like we exchange value from one company to another, and we got it pretty tax efficient. So that's a good news. So you don't need to pay a lot of attention into that part of the equation. What we basically did, and you can appreciate it, I'm sure, we put the right asset on either under the right ownership, put W to W where it naturally belong, and exchange it for a value that belongs to the refineries.

Doug Irwin (Analyst)

Got it. That's all for me. Appreciate the questions.

Avigal Soreq (CEO)

Thank you.

Operator (participant)

With no further questions, that concludes our Q&A session. I'll now turn the conference back over to CEO, Avigal Sorek, for closing remarks.

Avigal Soreq (CEO)

Thank you. So I would like to thank my leadership around this table, our employees, our board of directors, for you investors, and welcome the H2O team to the Delek to the DKL family. Thank you, guys, and we'll talk next quarter.

Operator (participant)

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