Delek Logistics Partners - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered record Adjusted EBITDA of $107.2M (+6% YoY) despite lower reported revenues due to sales-type lease accounting changes; diluted EPS was $0.68 and adjusted DCF was $69.5M.
• Strength in Gathering & Processing (Adjusted EBITDA $66.0M) and JV pipelines (W2W dropdown) offset weaker wholesale margins; coverage ratio improved sequentially to ~1.17x (as adjusted) but remains below the 1.3x long-term target.
• 2025 outlook initiated: Adjusted EBITDA $480–$520M, YE coverage ~1.3x, capex $220–$250M; Board authorized up to $150M buyback of Delek US-owned units through 2026 to advance deconsolidation and reduce units/distributions.
• Distribution increased for the 48th consecutive quarter to $1.105/unit; liquidity remains solid with $714.6M revolver availability and leverage ~4.06x at year-end.

What Went Well and What Went Wrong

What Went Well

• Strong segment mix: Gathering & Processing Adjusted EBITDA rose to $66.0M (+24% YoY) on higher Permian throughput and H2O Midstream contribution; JV income increased to $11.3M with W2W.
• Strategic milestones: Completed Gravity Water acquisition in January; expanded Midland acreage to ~400k; advancing Libby gas plant expansion and AGI/sour gas capabilities to deepen Permian “full suite” offering.
• Management confidence and capital returns: First-time 2025 guidance and $150M sponsor unit repurchase to accelerate economic separation; “We are proud of the 48th consecutive increase in our distribution…” (Avigal Soreq).

What Went Wrong

• Reported revenues fell (Q4: $209.9M vs $254.1M YoY) driven by reclassification under ASC 842 to sales-type leases (MVC payments recognized as interest income vs revenue), complicating top-line comparability.
• Wholesale Marketing & Terminalling softness: Adjusted EBITDA declined to $21.2M (vs $28.4M YoY) on lower wholesale margins and intercompany impacts.
• Coverage below target: Q4 distributable cash flow coverage ratio, as adjusted, was 1.17x (target 1.3x), with management guiding a recovery in 2H25 as projects and acquisitions ramp.

Transcript

Operator (participant)

Thank you for standing by. My name is Jale, and I will be your conference operator today. At this time, I would like to welcome everyone to the DKL Fourth Quarter 2024 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 (EVP)

Good morning, and welcome to the Delek Logistics Partners Fourth Quarter earnings conference call. Participants joining me on today's call will include Avigal Soreq, President; Reuven Spiegel, EVP; Mark Hobbs, EVP. 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 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. 2024 has been a transformational year for Delek Logistics, and we are pleased with its continued strong performance. In 2024, DKL is taking key steps to becoming a premier full-service crude, natural gas, and water provider in the prolific Permian Basin, and we expect to make further progress in 2025. I would like to take a moment to reflect on the things we were able to accomplish in 2024. We increased the financial and trading liquidity of DKL. We were also the first MLP to do two primary offerings in a year since 2017. We amended and extended contract between DKL and DK for a period of up to seven years, providing certainty around cash flows.

We completed the acquisition of Delek portion in Wink-to-Webster pipelines, which increased the overall asset quality at DKL and enhanced DKL's Permian position. We announced two acquisitions in the Midland Basin: H2O Midstream and Gravity Water Midstream, which enhanced our competitive position in the Midland Basin significantly. We are excited about our combined offering, and we are extremely pleased with the initial success we have seen so far. In the Delaware Basin, we are also making good progress in our processing plant expansion. The expansion is set to complete on time and on budget in the first half of 2025. As we complete the plant expansion, we also announced an FID on acid gas injection at the Libby Complex. AGI wells and sour gas treating capabilities enhance our competitive position in the Delaware Basin and provide a good runway of growth for Delek Logistics in the future.

Looking forward, in 2025, we'll continue to grow the partnership through prudent management of leverage and coverage. DKL also initiated a strong 2025 EBITDA guidance of $480-$520 million. This represents around 20% growth over 2024 adjusted EBITDA. DKL continues to provide one of the best combinations of yield and growth in the entire AMZ Index. We'll continue to increase our economic separation with our sponsor, DK. We are progressing the economic separation in a few different ways, and today we have announced an additional tool to enable the deconsolidation. Our board of directors have authorized up to $150 million buyback from our sponsor, DK, to enhance value for the DKL unit holders. I'm also pleased to announce that the board of directors has approved the 48th consecutive increase in the quarterly distribution to $1.105 per unit.

To conclude, we are very excited about the prospect of Delek Logistics. 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 Mark.

Mark Hobbs (CFO)

Thank you. As Avigal mentioned, we are growing Delek Logistics with a prudent management of liquidity and leverage. We manage our financial liquidity throughout 2024 by accessing both the debt and equity markets. Post the close of our acquisition of Gravity Water Midstream, we have approximately $530 million liquidity. We are also managing our leverage as we complete several important organic growth projects this year. Moving on to our fourth quarter results. The fourth quarter Adjusted EBITDA was $107.2 million compared to $100.9 million in the same period of 2023. Distributable Cash Flow, as adjusted, was $69.5 million, and the DCF coverage ratio was approximately 1.2 times. As mentioned previously, we expect this ratio to steadily move back to our long-term objective of 1.3 times in the second half of 2025.

As for the gathering and processing segment, Adjusted EBITDA for the quarter was $66 million compared to $53.3 million in the fourth quarter of 2023. The increase was primarily due to higher throughput from Delek Logistics' Permian Basin assets and contribution from H2O Midstream. Wholesale marketing and terminaling Adjusted EBITDA was $21.2 million compared to $28.4 million in the prior year. The decrease was primarily due to lower wholesale margins and impact of intercompany transactions. Storage and transportation Adjusted EBITDA in the quarter was $17.8 million compared with $17.5 million in the fourth quarter of 2023. The increase was mainly driven by higher storage and transportation rates. And lastly, the investments in pipeline joint ventures segment contributed $11.3 million this quarter compared with $8.5 million in the fourth quarter of 2023. The increase was primarily due to the contribution from the Wink-to-Webster dropdown in August of last year.

Moving on to capital expenditures. The capital program for the fourth quarter was $49.4 million, of which $42.1 million was allocated to the new gas processing plant. The remainder of the spend in the quarter was for growth projects, namely advancing new connections in the Midland and Delaware gathering systems. Along with initiating our full-year EBITDA guidance of approximately $500 million at the midpoint, we have also announced today our 2025 capital guidance. In 2025, we expect to spend a total of approximately $75 million on completing our Libby processing plant expansion and approximately $160 million on growth and maintenance projects. 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 and ensure that your phone is not on mute when asking your question. We do ask that for today's session that you please restrict yourself to one question and one follow-up. Your first question comes from the line of Doug Irwin of Citi. Your line is open.

Avigal Soreq (President)

Hey. Good morning, Doug.

Douglas Irwin (VP)

Hey, thanks for the question. Good morning. I'm just going to start with the EBITDA guidance here. Just looking at some of the prior benchmarks you've put around the acquisitions and the processing plant expectations, it points to a relatively conservative guide, at least at the low end of the range. So I was just curious if you could maybe talk a little bit about what might drive the high end versus the low end here, and then maybe kind of where you see yourself exiting the year, given some of the moving pieces throughout.

Avigal Soreq (President)

Hey, Doug, thanks for the question, and listen, that's the first time we are giving guidance. DKL obviously is a growing company as we demonstrate, and as you can very well see, obviously we are increasing the economic separation between DK and DKL in every step that we are doing, and for sure, with the step that we announced today of the $150 million buyback from our sponsor, and we want to help you and others to model us better, and that's what we try to do today. We feel confident with the guidance we gave today, and obviously we are looking forward to update you down the road. If there is more modeling questions, obviously you can follow up with Mohit for more detailed questions on how to get the exact model, but that's where we are today, and obviously, there are always opportunities in the future.

Douglas Irwin (VP)

Understood. Yeah, appreciate the first-time guidance. Maybe a follow-up on the buyback program, maybe a two-part question here. Just first, just curious how quickly you expect to be able to execute on that $150 million. And then second, just how you're thinking about funding these buybacks. Are you looking to potentially fund it all internally with free cash flow, or are you maybe willing to use debt here given the discounted yield relative to where the equity is trading? And if so, just curious where you see leverage over the near term.

Avigal Soreq (President)

Yeah, absolutely. So if we're looking at it from a free cash flow standpoint, Doug, and I'm sure that you can appreciate it, our cost of capital on the debt side is around 7%. And what we see here today at $40 is close to 11. So that's obviously very beneficial from a free cash flow standpoint for DKL, and that's something that our partnership likes a lot. Also, you can for sure appreciate that the deconsolidation effort is an initiative of both companies, both DKL and DK, and the reason is that it will allow DKL to completely fulfill its potential without sponsors. So those two initiatives are very well embedded in that. We are not going to give guidance, specific guidance. It's going to be subject to market conditions and DKL offering that to DK.

But that's something that we definitely look very closely and are working hard on that. But I will let Reuven chime in more on that and to give some more colors.

Mark Hobbs (CFO)

Just two bullet points. One, it's a two-year program, and we have to execute that while complying with the company covenants and leverage ratio targets. Obviously, that will be in place as long as the DKL share price makes sense from free cash flow accruing for the company.

Douglas Irwin (VP)

Understood. Thanks.

Avigal Soreq (President)

Thank you.

Operator (participant)

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

Avigal Soreq (President)

Hey, good morning.

Good morning. Thanks for the time, guys. My question is a little bit about the same. I'd love to see the guidance. Obviously, it looks great on EBITDA. I'm just wondering, besides you mentioned release, it's nice to see the upside that's going to happen around the Libby plant expansion. Could you speak to, and maybe just maybe other notable drivers you would share with us that's driving this upside potential around the EBITDA you're showing this year?

Yeah. So we have many chips in this guidance, right? We obviously finished the Gravity deal. We finished the H2O deal. We announced the Libby plant. We announced the AGI and the sour effort. And obviously, there are synergies among all of that, and we have W2W. So there is really a mix of transactions that we have done, and we felt, Neal, that it's very much necessary to give you guys clear guidance and make your life just a little bit easier in terms of where we land. And I think it's very important to investors to see how much our currency is cheap versus the entire AMZ Index and how good of a position it is. So I think that's the reason we decided to give that, because of the amount of transactions we did and to reflect more how discounted we think our currency is.

So that's the reason we did it, and I'm sure that you can appreciate it.

Yeah, I would definitely appreciate it. The discount is definitely obviously seen out there right now. And then just my follow-up would be on the key 3Bear assets of yours, which continue to be so good. Just wondering, how is, when you look at those assets, just wondering, how is demand and utilization of these assets looking?

Yeah. So we would not expand those assets if we wouldn't see a strong demand. Obviously, the gas in the Delaware Basin area looks very good. We have many discussions with our producer that we have acquisitions with. But another point I would like to highlight for you, Neal, is our comprehensive offering of crude, gas, and water proves itself very nicely in the Delaware Basin. And that's part of the reasoning that we implemented the same concept also on the Midland Basin. So that's paying us dividends, and we are very happy about that. That's the reason we felt confident with Libby II, or the expansion, and we went also to the sour. So we feel confident to the tactics and also to the strategy.

Very good. Thank you.

You bet.

Operator (participant)

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

Avigal Soreq (President)

Yeah, absolutely. Thank you. Today, I would like to thank my colleagues around the table. I would like to thank the entire Delek Logistics employees, our board of directors, and for you investors, and we'll meet again in the next quarter. Thank you.

Operator (participant)

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