Delek US Holdings (NYSE: DK)
Highlights:
- Delek US Holdings (DK) owns 63.6% of publicly listed stable midstream pipelines business Delek Logistics Partners (DKL) which generates predictable cash flows due to their fee-based business model based on the volume transported on their pipelines, sports more than 11% dividend yield on current prices. DK is preparing to deconsolidate its ownership in DKL and DKL will be a separate company as of middle to end of this year.
- Remainder of the holding company, 4 wholly owned refineries with 302K barrels throughput capacity, with a small net debt (~$160M) is selling in the market for negative $220M in value, which generated more than $100M in average operating earnings in the last 10 years.
- In 2025, DK is expected to make ~$160M in free cash flow accounting for the distributable earnings from DKL, Refinery earnings/losses and corporate expenses while the company is valued at ~1B USD.
Business Introduction:
Delek US is one of the smaller refiners of petroleum products in US. It owns a majority stake (63.6%) and controls the pipelines/logistics company (DKL) and it used to own the retail chain (DK gas stations), which got sold to FEMSA last year.
Refinery Operation:
DK currently owns and operates 4 refineries in the Gulf Coast, Mid-Continent of the United States with an aggregate crude oil refining capacity of ~302,000 barrels per day. There is no new refinery has been built in the US for more than 30 years. The existing refineries have been getting better and better to handle more volume at cheaper unit costs. It is unlikely to build another one in the country given the difficulty of getting permits, land availability and infrastructure costs, so the existing refineries has large value to a strategic buyer. Here are the EBITDA historically for the last 10 years.
|
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
|
464 |
192.6 |
139 |
450 |
865 |
778 |
-330.5 |
69.2 |
719.1 |
529.4 |
Refinery operations’
EBITDA is dictated by the crack spreads of the refinery which is a difference
between an input crude oil prices and output of refined petroleum products. The
volatility of oil prices in the short term makes this divisions profits swing
either way. Here is the crack spread over the years.
|
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
|
13.4 |
14.7 |
9.12 |
13 |
13.18 |
15.77 |
8.18 |
16.56 |
33.4 |
27 |
Mid-Stream Pipelines:
Delek Logistics Partners
(DKL) is a master limited partnership (“MLP”) formed in 2012 and setup by the
parent company DK. It owns and operates midstream energy infrastructure and
logistics assets, and provides fuels distribution services. DKL owns more than 1800
miles of pipelines and more than 10M barrels of storage capacity. This division
produced $418M in EBITDA for 2024. DK received $136M in dividends from DKL in 2024.
DKL is becoming more and more of independent pipeline operator earning mostly
fee revenues based on volume transported on their pipelines as they expect to bring
2/3 of their cash flow from third party producers and processors other than DK.
DKL has $1870M in net debt as of Q4 2024 relative to their $418M in EBITDA and
distributable cash flow of ~$260M for 2024. For 2025, the company is expected
to make EBITDA around $500M. DKL has a market capitalization of $2.2B now.
Here is the historical
EBITDA contribution from logistics segment:
|
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
108.5 |
108.7 |
121.9 |
169.8 |
173.4 |
238.1 |
255.7 |
315.3 |
378.2 |
418 |
Conservative
balance sheet (DK Parent):
Cash: ~$730M, Total debt at
holding company (Q4 2024): $890M (not including DKL’s portion); Net debt
Valuation:
Stock
Price: ~$15.5/share; Market Cap: ~$1B (02/26/2025); Net Debt: $160M; Enterprise
Value: ~$1160M
DKL
market value of 63.6% @ $40/share (market price): ~$1.38B @ FCF to market cap multiple
of 8.4.
Refinery
operation: Valued at negative EV of $220M based on the above.
When
adjusted for net debt and DKL ownership position, investors at current prices
are paying negative value for the refiners. In another way, investors pay less
than $1160M in Enterprise value for 4 refiners and 63.6% of the DKL pipeline
company which produced over $260M in distributable cash flows.
Catalysts:
- Some form of normalcy in the derived petroleum products and hence the crack spread in the refinery business produce earnings.
- Attractive valuation relative to their refinery assets and cash flows of their DKL logistics earnings.
- Management is aware of the discounted value of the company in the stock market relative to their assets and cash flows, especially the Sum of the Parts (SotP) value, they are incentivized to narrow the gap between the value and the price by separating DKL from DK. Management’s latest presentation gives an illustrative way to value of the company assigning Sum of the Parts value, can be found here. https://s203.q4cdn.com/138381933/files/doc_financials/2024/q4/DK-4Q24-Earnings-Slides-2.pdf
Risks:
- General economic downturn may hinder the growth/potential of the business as the refinery business is cyclical.
- If it takes longer to return to normalcy on the refinery operation, then large losses may erode the margin of safety and the valuation of the whole company.
Summary:
- Stable business through the ownership of pipelines combined with cyclical refinery operation.
- Spin off of the DKL ownership to shareholders will bring more than current value as a dividend to shareholders.
- Good liquidity with small net debt business during the downturn to survive and thrive.
- Priced very attractive relative to the current and future potential profits.
Disclosure: I own shares
of DK.
