Delek Logistics Partners - Q3 2024

Transcript

Operator (participant)

Thank you for standing by. My name is JL and I will be your conference operator today. At this time I would like to welcome everyone to the DKL's third 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. Now let's turn the conference over to Robert Wright, Deputy Chief Financial Officer. You may begin.

Robert Wright (Deputy CFO)

Good morning and welcome to the Delek Logistics Partners thrid quarter earnings conference call. Participants joining me 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 and including statements regarding guidance and future business outlook. Any forward-looking statements made during today's call involve 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 in 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 (President)

Thank you, Robert. Delek Logistics Partners had another record quarter. We reported approximately $107 million in quarterly adjusted EBITDA. We are pleased with Delek Logistics continued strong performance. DKL is a premier full service crude natural gas and water provider in the prolific Permian Basin and our recent actions have significantly enhanced our position. In Q3 of 2024 we closed several important transactions. First, on August 5th we amend and extend contract between DKL and DK for a period of seven years. Second, we completed the acquisition of Delek's portion in Wink to Webster Pipeline. W2W is a premier crude oil pipeline backed by investment grade counterparties. It increases the overall asset quality at DKL and enhanced DKL payor position. Third, on September 11th we closed the acquisition of H2O Midstream. We're excited about our combined offering in the Midland Basin.

While it's still early, this combination is already more attractive option for our customers and is presenting several cross sell opportunities in the Delaware Basin. We are also making good progress on our processing plant and expansion and still expect to complete the expansion on time and on budget in the first half of 2025. As discussed previously, the plant is highly subscribed and we are making progress on completion. We are already seeing additional opportunities around sour gas treatment. On October 29, the Board of Directors approved an increase in the quarterly distribution to $1.10 per unit. We are very excited about the prospect of Delek Logistics. DKL is seeing several organic and inorganic growth opportunities and we are taking prudent approach to growth. DKL has shown strong track record of delivering value to unitholders.

We expect to continue on our value creation path moving forward and we will continue to grow our distribution in the future. I will now hand it over to Reuven.

Reuven Spiegel (EVP and CFO)

Thank you. As Avigal mentioned, we are growing Delek Logistics with prudent management of liquidity and leverage. We have managed liquidity throughout the year by accessing debt and equity markets. We currently have approximately $780 million of liquidity post the recent equity offering. We are also managing our leverage as we get into core spending period on our new gas processing plant expansion. Moving on to our third quarter results, the third quarter adjusted EBITDA was approximately $107 million compared to $98.2 million in the same period of 2023. Distributable cash flow as adjusted was $62 million and the DCF coverage ratio was approximately 1.1 times.

We expect this ratio to steadily move back above our long-term objective of 1.3 times in the second half of 2025 as we realize the benefit of the various initiatives Avigal just spoke about. As for gathering and processing segment, adjusted EBITDA for the quarter was $55 million compared to $52.9 million in the third quarter of 2023. The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets and small contribution from H2O post the transaction which was closed in mid-September. Wholesale marketing and terminalling adjusted EBITDA was $24.7 million compared with $28.1 million in prior year.

The decrease was primarily due to lower wholesale margins. Storage and transportation adjusted EBITDA in the quarter was $19.4 million compared with $17.9 million in the third quarter of 2023. The increase was mainly driven by higher storage and transportation rates and lastly the investment in pipeline joint venture segment contributed $15.6 million this quarter compared with $9.3 million in the third quarter of 2023.

The increase was primarily from the Wink to Webster drop-down contributions moving on to capital expenditures. The capital program for the third quarter was $65.2 million of which $53.4 million was allocated to the new gas processing plant. The remainder of the spend in the quarter was the growth projects, namely advancing new connection in the Midland and Delaware gathering systems. Along with our previously announced capital budget for 2024, we expect to spend a total of $90 million-$100 million in second half of 2024 on the new gas processing plant. With that, we can open the call for questions.

Operator (participant)

Thank you. The floor is now open for questions. If you're 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 your question and are listening via a loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute while asking your question. Your first question comes from the line of Doug Irwin of Citi. Your line is open.

Doug Irwin (VP)

Hey, thanks for the question. I just wanted to start with the processing plant. It looks like you've already spent over half of the expected CapEx there. Just wondering if you could talk about the progress and any updated expectations on timing, and then just curious if you could talk about the potential sour gas opportunities with this plant and DKL's ability to potentially take advantage of the need for some more sour gas treating in the Delaware.

Avigal Soreq (President)

Yeah, thank you Doug for the two great questions. So first of all, progress around the plant goes very well. We are very happy with the construction and the commercial side of that. So that's absolutely going the right way. Obviously, as you heard on my prepared remarks, we see opportunity around sour and which are very attractive. I would put it this way and expect that we'll come back to you about that sooner than later. Odely, do you want to be more specific about the progress of the gas plant?

Odely Sakazi (SVP)

Yes, please. Avigal, thank you. And Doug, good morning. Appreciate the question. So, regarding the progression, as we mentioned before, everything is going very well both from schedule and also from a cost perspective. As we mentioned, we are looking to have the plant ready on the first half of 2025, which is still the projection. Everything is progressed very well from a construction standpoint. All civil work is already being started, major equipment is there.

So we're really happy about the progress about it and also on the schedule and also on the cost on the sour side, as Avigal mentioned, that's opportunity. It's something that is really interesting and we're excited about that. Part of the 3 Bear acquisition which now is DDG, we have the two AGI wells permits that we are looking to continue to use that. And as Avigal mentioned more to come around that. But we're very excited about that opportunity for us for DKL.

Avigal Soreq (President)

As you probably saw, we see a very attractive valuation for those assets over there, and that's something that we'll come back to sooner than later.

Doug Irwin (VP)

Great. Thanks for that. My second question is just on Midland volumes. It took a little bit of a step lower this quarter. Could you maybe just talk about what trends you're seeing there? Maybe if you could also provide some more details on the acreage dedication that was announced last month. Just any sort of guideposts around MVCs or volume expectations moving forward would be helpful. Thanks.

Avigal Soreq (President)

Yeah, absolutely. So, Doug, we are really fortunate to have the system, the DPG on the location. We are, we have. We see a great value in the area. The acreage dedication deal that we did when we announced is extremely accretive for us. And Odely will give more color around it.

Odely Sakazi (SVP)

Yeah. Thank you, Avigal. So, Doug, as you mentioned, we've done around 185 in the third quarter. This is kind of a mix of two things. One, the project timing, execution. And also, as we mentioned before, we saw a consolidation in the GP and landscape. So we see optimization around the rigs for our producer and also moving some of the rigs to a new acreage. So we are still looking to be around 190 in DPG by the end of the year and above 200 in 2025.

As mentioned, the 50,000 acreage that we just added in DPG is something that we're really excited about because of the fact that we are able to continue to grow the acreage that's dedicated to us in DPG in an area that, like the Midland area, where it's a very mature area from that standpoint. So from a volume standpoint, this is where we're going to see an incremental to go above the 200 and also getting even further beyond for 2026 as well.

Doug Irwin (VP)

Got it. Thank you.

Odely Sakazi (SVP)

Thank you, Doug. Appreciate you.

Operator (participant)

Your next question comes from the line of Neal Dingmann of Truist Securities. Your line is open.

Neal Dingmann (Managing Director of Energy Research)

Morning all. My question just on the H2O Midstream, really unique acquisition. I'm just wondering again, you talked a little bit on the integration. I'm just wondering, how do you envision this? You mentioned kind of the upside that it'll mean. I guess I have two questions here. How this will sort of integrate with the 3 Bear assets and thus how much quicker do you think you'll envision, sort of call it incremental third party cash flow as a result of having this combination.

Avigal Soreq (President)

Yeah. So H2O Midstream is on the DPG side of the area and goes very well with the system we have built there over time. Integration is pretty much done. We can say that the people of H2O are part of the Delek Logistics team. They are part of our partnership. We are very pleased with the integration both on the G&A side, the accounting and IT system and the business development side and also the operations side. For example, yesterday we just had a great meeting with their team and we are really blessed to have them on our team on a more strategic basis. Obviously having the water and the crude in this area give us a bundling sales opportunity and take our discussion with our customer to a new level. We are very pleased about it. That's a really good one.

Neal Dingmann (Managing Director of Energy Research)

No, I can't wait to see that. And then second question, just on capital allocation, specifically, how do you all think about potential distribution, growth versus debt payment or where you would like your leverage or distribution coverage to be?

Avigal Soreq (President)

Yeah, so we are very proud, Neal, about the fact that we increased our distribution 47 times in a row. With that said, we will. I said it very clearly that our goal is to continue with the increase of distribution and we are, we're going to push that forward. The long-term leverage ratio that we are targeting is three and a half times. Our job is obviously to balance between the growth opportunity, the liquidity, the leverage ratio and the coverage ratio. And that's what we are doing. We gave a lot of growth opportunities around our area in Odely. Do you want to talk about that more?

Odely Sakazi (SVP)

Yeah, absolutely. And as Avigal mentioned, we are in a growth mode in Delek Logistics and kind of managing all of that and making it in a very sustainable way as well. We did mention about the additional acreage that we got in DPG, also the implementation of H2O and associated synergy around that in the DPG area, along with also the gas plant or the new gas plant, along with a lot of need for infrastructure that we see in the Delaware, along with also sour. So all those opportunities is something that we have two assets in the most prolific location in the United States, both on the Midland side and also on the Delaware side. So we're really excited about those opportunities.

Neal Dingmann (Managing Director of Energy Research)

Makes sense. Thank you.

Avigal Soreq (President)

Thank you, Neal.

Operator (participant)

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

Avigal Soreq (President)

I want to thank my friends around the table for the great progress we are doing with our partnership. To the board of directors that support the progress we are doing and to the investor that join our call and invest in our share and trusting in us, and first and foremost, to our great employees that makes this company great to work for. Thank you and we'll talk again in the next quarter.

Operator (participant)

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