Delek Logistics Partners Q2 2024 Earnings Call Transcript

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August 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 Delek Logistics Partners Q2 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 CFO. You may begin.

Speaker 1

Good morning, and welcome to the Delek Logistics Partners' 2nd 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 Odeli 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. 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 ks and quarterly report on Form 10 Q filed with the SEC along with the press release associated with this call.

Speaker 1

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?

Speaker 2

Thank you, Robert. Delek Logistics Partners had another record quarter. We reported $102,400,000 quarterly adjusted EBITDA. I'm pleased with our continued performance. We have made several announcement today.

Speaker 2

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 amended extent of the contract between DKL and DK. The extensions remove an overhang on the DKL unit.

Speaker 2

It moves away from month to month to contract terms of up to 7 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 term in position. 2nd BKL announcement today is the investment in a new gas processing plant.

Speaker 2

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 twenty twenty five. The last transaction DKL announced today is the acquisition of H2O Midstream for $160,000,000 of cash $70,000,000 preferred. The transaction is immediately accretive to DKL on an EBITDA and free cash flow basis. The acquired asset fits very well within DKL existing footprint.

Speaker 2

Assets further expand our capabilities to be comprehensive provider of midstream services in the Permian Basin. Once these transactions are complete in the first half of twenty twenty five, a majority of DKL EBITDA will be from non related parties, making DKL 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.

Speaker 2

I want to welcome the H2O team to the DKL family and wish them continued success and good luck.

Speaker 3

I will now hand it over to Ruben. Thank you, Abigail. As Abigail 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 3.81 times at the end of the Q2 of 2024 from its high point of 4.84 at the end of 2022 and 4.34 at the end of 2023.

Speaker 3

Moving on to our Q2 results. The 2nd quarter adjusted EBITDA was $102,400,000 compared to $92,800,000 in the same period of 2023. The distributable cash flow was $68,000,000 and the DCF coverage ratio was 1.32 times. For the Gathering and Processing segment, EBITDA for the quarter was $54,700,000 compared to $52,600,000 in the Q2 of 2023. The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets.

Speaker 3

Wholesale Marketing and Terminalling EBITDA was $30,200,000 compared to $28,000,000 in the prior year. The increase was primarily from higher terminalling utilization. Storage and transportation EBITDA in the quarter was $16,800,000 compared to $15,000,000 in the Q2 of 2023. The increase was mainly driven by higher storage and transportation rates. And lastly, the investment in Pipeline Joint Venture segment contributed $7,900,000 this quarter compared to $7,300,000 in the Q2 of 2023.

Speaker 3

Moving on to capital expenditures. The capital program for the Q2 of 2024 was 10,200,000 dollars Most of the spend in the quarter was for growth projects, namely advancing new connections in the Midland and Delaware Gathering system. Along with our previously announced capital budget for 2024, we expect to spend $90,000,000 to $100,000,000 in the second half of twenty twenty four on new 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 Neal Dingmann of Truss Securities. Your line is open.

Speaker 4

Hi, good afternoon guys. Thanks for the time. My first question is just on the 820 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 as you have future customer opportunities?

Speaker 4

And then secondly, you all talked about the potential near term cost and revenue synergies. I'd love to hear maybe more about that.

Speaker 2

Yes, absolutely, Neil. So there are 3 aspects to that. 1, the same customer, you can have a more comprehensive view about deals that you are doing with customers. The second point around that is that basically the operation are on the top of each other, so you can be very efficient on the way you are in your operation. And the third, this infrastructure can be relevant for both services.

Speaker 2

So this is accretive, very accretive deal for us and is extremely energetic.

Speaker 4

No, I would agree. And then secondly, just on the new Delaware Gas Plant. What could be timing 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 beginning next year after you close. And I'm just wondering what how soon could you see some of those future gas opportunities? And what might that consist of?

Speaker 2

Yes. So our gas plant is completely synergetic with the current gas plant we have. We said that we're going to complete it the second the first half of twenty twenty five, and we it's already being nicely subscribed. So, Dari, I don't know if you want to add into that. Yes.

Speaker 2

Just a little bit and

Speaker 5

to your comment, Neil, 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 Abhijal mentioned. So we see that timing pretty much as soon as possible from Arsen.

Speaker 4

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

Speaker 2

You bet. Thank you.

Operator

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

Speaker 6

Hi, thanks for the question. I just wanted to touch on the $55,000,000 to $85,000,000 EBITDA range you provided for the transactions this morning. I was wondering if you could talk about some of the assumptions for 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 under consideration there?

Speaker 6

And then should we expect that to kind of be a good run rate for 2025 or is that ramping over time?

Speaker 2

So there are 3 main components around that, right, like we outlined. 1 is the DK Contact, the main extent, second is the W2W and third is the H2O Midstream and 4th 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 I think that a good estimation is to take the midpoint out of that. It's a good number to assume going forward.

Speaker 6

Okay, great. That's helpful. And 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 6 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 on interpreting that correctly.

Speaker 6

And if so, maybe get a little more detail around how that might play into the deconsolidation priorities at the DK?

Speaker 2

Yes, absolutely. So there are units that are changing hands, but the net amount is not big between the company. So it's like we exchange value from 1 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.

Speaker 2

What we basically did, and you can appreciate it, I'm sure, we put the right asset under the right ownership, put W2W where naturally belong and exchange it for a value that belongs to the refineries.

Speaker 6

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

Speaker 3

Thank you.

Operator

With no further questions, that concludes our Q and A session. I will now turn the conference back over to CEO, Avigail Sorek, for closing remarks.

Speaker 2

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

Operator

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

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