Delek Logistics Partners Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 6, 2024

There are 7 speakers on the call.

Operator

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 speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Robert Wright, Deputy Chief Financial Officer. You may begin.

Speaker 1

Good morning, and welcome to the Delek Logistics Partners' 3rd quarter earnings conference call. Participants joining me on today's call will include Abigail Sorek, President Joseph Israel, EVP Operations Ruben Spiegel, EVP and Chief Financial Officer and Odell Sakhazi, 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 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.

Speaker 1

The company assumes no obligation to update any forward looking statements. I will now turn the call over to Avigal for opening remarks. Avigal?

Speaker 2

Thank you, Robert. Delek Logistics Partners had another record quarter. We reported approximately $107,000,000 in quarterly adjusted EBITDA. We are pleased with Delek Logistics' continued strong performance. V KL 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.

Speaker 2

In Q3 of 2024, we closed several important transactions. 1st, on August 5, we amend and extend contracts between DKL and DK for a period of 7 years. 2nd, 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 enhance DKL payment position.

Speaker 2

3rd, on September 11, 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 expansion and still expect to complete the expansion on time and on budget in the first half of twenty twenty five. As discussed previously, the plant is highly satisfied and we are making progress on completion.

Speaker 2

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. ZKL has shown strong track record of delivering value to unitholders.

Speaker 2

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 Ruben.

Speaker 3

Thank you. As Abigail 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 $780,000,000 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.

Speaker 3

Moving on to our 3rd quarter results. The 3rd quarter adjusted EBITDA was approximately $107,000,000 compared to $98,200,000 in the same period of 2023. Distributable cash flow as adjusted was $62,000,000 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 twenty twenty five as we realize the benefit of the various initiatives Avigail just spoke about. As for gathering and processing segment, adjusted EBITDA for the quarter was $65,000,000 compared to $52,900,000 in the Q3 of 2023.

Speaker 3

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 $24,700,000 compared with $28,100,000 in prior year. The decrease was primarily due to lower wholesale margins. Storage and transportation adjusted EBITDA in the quarter was $19,400,000 compared with $17,900,000 in the Q3 of 2023. The increase was mainly driven by higher storage and transportation rates.

Speaker 3

And lastly, the investment in pipeline joint venture segment contributed $15,600,000 this quarter compared with $9,300,000 in the Q3 of 2023. The increase was primarily from the week to Webster drop turn contributions. Moving on to capital expenditures. The capital program for the 3rd quarter was $65,200,000 of which $53,400,000 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.

Speaker 3

Along with our previously announced capital budget for 2024, we expect to spend a total of $90,000,000 to $100,000,000 in the second half of twenty twenty four on the new gas processing plant. With that, we can open the call for questions.

Operator

Thank you. The floor is now open for questions. Your first question comes from the line of Doug Irwin of Citi. Your line is open.

Speaker 4

Hey, thanks for the questions. 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 at this plant and DKL's ability to potentially take advantage of the need for some more sour gas treating in the Delaware?

Speaker 2

Yes. Thank you, Doug, for the two great questions. So first of all, progress around the plant goes very well. We're very happy with the construction and the commercial side of that. So that's absolutely going the right way.

Speaker 2

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. Otero, do you want to be more specific about the progress of the gas plant?

Speaker 5

Yes, please. Avigail, thank you and Doug, good morning. Appreciate the question. So regarding the progression, as we mentioned before, everything is going very well, both on schedule and also from a cost perspective. As we mentioned, we are looking to have the plant ready on the first half of twenty twenty five, which is still the projection.

Speaker 5

Everything is progressed very well from a construction standpoint. All stable work is already been 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 Abhijal mentioned, it's an opportunity that it's something that is really interesting and we're excited about that. Part of the Tree Bear acquisition, which now is DDG, we have the 2 AGI wells permits that we are looking to continue to use that.

Speaker 5

And as Abigail mentioned, more to come around that, but we're very excited about that opportunity for us with BKL. Yes.

Speaker 2

Tagge, 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 you sooner than later.

Speaker 4

Great. Thanks for that. And then 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?

Speaker 4

And then 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.

Speaker 2

Yes, absolutely. So, Doug, we are really fortunate to have the system, the DPG on the location 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 Odeli will give more color around it.

Speaker 5

Yes. Thank you, Avigail. So Doug, as you mentioned, we are we've done around 185 in the Q3. This is kind of a mix of 2 things. 1, the project timing execution.

Speaker 5

And also as we mentioned before, we saw consolidation in the GPN 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 add 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's 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.

Speaker 4

Got it. Thank you.

Speaker 3

Thank you, Doug. Appreciate you.

Operator

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

Speaker 6

Good morning, Neal. My name is just on the H2O mission, a 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 will mean, I guess, I have 2 questions here.

Speaker 6

How this will sort of integrate with the 3 bare assets? And does 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?

Speaker 2

Yes. 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 logistics team. They are part of our partnership.

Speaker 2

We are very pleased with the integration both on the G and A side, the accounting and IT system and the business development side and also the operation side. For example, yesterday, we just had a great meeting with their team and we're really blessed to have them on our shop. On a more strategic basis, obviously, having the water and the crude in this area give us a bundling sale opportunity and take our discussion with our customer to the new level and we are very pleased about it. So that's a

Speaker 3

really good one.

Speaker 6

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?

Speaker 2

Yes. So we are very proud, Neil, 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 going to push that forward. The long term leverage ratio that we are targeting is 3.5 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.

Speaker 2

We gave a lot of growth opportunities around our area. And Odeli, do you want to

Speaker 3

talk about it more? Yes, absolutely. And as Vivekal mentioned, we

Speaker 2

are in a growth mode in

Speaker 5

mentioned, we are in a growth mode in Delek Logistics and kind of managing all of that and make it in a very sustainable way as well. We did mention about the additional acreage that we got in DPG, also the implement of H2O and associate 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 as long with also sour. So all those opportunities is something that we have 2 assets in the most prolific location in the United States, both on the Midland side and also in the Delaware side. So we're really excited about those opportunities.

Speaker 6

Makes sense. Thank you.

Speaker 2

Thank you, Nick.

Operator

With no further questions, that concludes our Q and A session.

Speaker 3

I will now turn the

Operator

conference back over to the President, Avigail Sotek for closing remarks.

Speaker 3

So I

Speaker 2

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 testing in us. And 1st 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

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

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Delek Logistics Partners Q3 2024
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