Delek Logistics Partners, LP (DKL) Q2 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Delek Logistics' Second Quarter 2021 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Blake Fernandez, SVP of Investor Relations. Please, go ahead.

Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners' second quarter 2021 financial results. Joining me on today's call will be Uzi Yemin, our General Partners Chairman and CEO; and Rueven Spiegel, CFO; as well as other members of our management team. As a reminder, this conference call may contain forward-looking statements as that term is defined under Federal Securities laws. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results which can be found in the press release, which is posted on the investor relations section of our website. Our prepared remarks are being made assuming that the earnings release has been reviewed and we are covering less segment and market information than is incorporated into the 2Q press release. On today's call, Reuven will begin with a financial overview. I will review results, and Uzi will offer a few closing strategic remarks. With that, I'll turn the call over to Reuven.

Thank you, Blake. Our distributable cash flow was approximately $54 million in the second quarter of 2021 compared to $57 million in the second quarter of 2020. Our DCF coverage ratio was 1.32 for the second quarter compared to 1.58 in the prior year period. EBITDA was $67 million, which represents 3% increase over the prior year period. We increased our quarterly distribution to $0.94 per limited partner unit for the quarter ended June 30. This distribution is to be paid on August, 11, 2021 and represents a 2.2% increase from the first quarter of 2021 and 4.4% increase from the second quarter of 2020. At June 30, DKL had approximately $561 million of available capacity on our $850 million credit facility. Our total debt was approximately $929 million, and the total leverage ratio is 3.6 times, which is within the 5.25 times currently allowable under our credit facility. Now, I will turn the call over to Blake to discuss the results.

Thanks, Reuven. In our Pipelines and Transportation segment, the second quarter contribution margin was $45 million compared to $43 million in the second quarter of last year. This increase was primarily attributable to the dropdown of the trucking assets dropped on May 1, 2020 and Paline Pipeline performance. In our Wholesale Marketing and Terminalling segment, the contribution margin was $19 million in the second quarter of this year compared to $19 million in the second quarter of last year. During the second quarter of 2021, equity income from our crude oil joint venture pipelines was approximately $7 million, which was flat with the prior year period. Capital expenditures were approximately $2.6 million in the second quarter, which consisted of $1.5 million of discretionary spending and $1.1 million of sustaining maintenance. For full year 2021, our total gross capital expenditure forecast is $29 million, which includes $18.4 million of discretionary and $11.1 million of maintenance capital. With that, I will turn the call over to Uzi for his closing comments.

Thank you, Blake and good morning, everybody. We witnessed a strong sequential increase in performance in the second quarter based on the lack of winter weather impact, lower turnaround activity, and no maintenance of the Paline Pipeline that occurred in the first quarter. We successfully raised $400 million of debt to a senior note offering creating flexibility and extending our maturities. We continue our long history of distribution growth with a third -- 33rd consecutive increase, and we remain committed to delivering a 5% increase on the full-year basis. Our distribution coverage and leverage ratios remain healthy and our [indiscernible] Delek US has no major maintenance planned for the rest of the year. With that, operator, can you please open the call for questions?

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Spiro Dounis of Credit Suisse. Please go ahead.

Hey, morning guys. Uzi, first one for you. I was hoping to hear your thoughts on the macro setup here into the back half of the year. It seems like a lot of green shoots out there and energy, of course, with the exception of the Delta variant driving some lockdowns overseas. I believed even before that you’ve always been kind of bit cautious on demand and the rebound there in 2021. I think you saw it more of a 2022 story. So, just curious is that more or less materializing kind of like how you expected, really just any thoughts on that setup for GMP and downstream in the second half would be great.

Yeah. Good morning, Spiro. Thanks again for your interest. You asked several questions, let me try to answer each one of them. And if I did a poor job, just push back and ask for more info.

You bet.

Vis-a-vis the demand situations. We -- I have not changed my mind. We have not changed our mind. And we think that the demand situation will get back to normality only in 2022. I don't know that the Delta variant is a big factor here. I don't know, it may be. But at this point, I see it being contained for the time being. I think that Israel is already giving third vaccine. We'll see how it works. So, I think the rebound, the big rebound is being expected toward the end of this year, 2021 and 2022. I do think that 2022 will be, as we said in the past, very, very strong year, probably the strongest we've seen, just because of the fact that people will get tired after being at home for almost two years. I think, employers, CEOs are anxious to see their employees back to the office, and I do believe that that would happen. So, the demand situation is getting there. We see the demand, we're what, 5% to 7% below 2019. I think we will get back to normality toward the end of this year and early next year. You are asking about the activities in the energy sector. We also -- the acquisition of -- or the merger of HFC and Sinclair, I think that there will be more and more merger and acquisitions. Energy sector is ripe for changes. I must say that everybody talks about energy transformation. I think that we're a little bit too fast to come to conclusions that fossil fuel is out of the picture. I think we have many years ahead of us. Obviously with the changing market, carbon capture as well as ESG, but I still drove my car here to the office this morning, and I don't think I -- that would change over the next five years. Last, you asked about our situation. We haven't changed our mind much. We still have the organic growth that we mentioned in the Slurry project, the Red River that came to fruition, the Paline situation that is getting there. Obviously, [indiscernible] with the wins and towards the end of next year 2022, we need to look carefully us dropping down Wink to Webster. I think, I hope I answered every question that you had.

Yeah. No, no. I’d appreciate the great color. And so, your last comment is that -- time to my next question, which is on these growth projects. I think you said that you'd want to complete a lot of your organic growth that you've got going on out there, just before dropping down Krotz Springs, sounds like Wink to Webster to your point is, is kind of a next year event. But just curious where we're at in terms of timing between completing some of these growth projects organically before moving on to Krotz Springs.

Well, Krotz Springs is a different thing, we'll discuss it later on today, but with the Supreme Court decision of [indiscernible]-- is at the top of the list, if you will, even with the administration to [indiscernible] we've been granted the exemption of Krotz, then Krotz is certainly a very good refinery, and then we should consider carefully dropping down the assets of Krotz. And of course, then I mentioned the Wink to Webster and other maybe organic or inorganic projects as we look forward to an improving market.

Perfect. That's all I have today, guys. Thank you.

Thank you, Spiro.

[Operator Instructions] There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Uzi Yemin for closing remarks.

Yeah. Thank you. I'd like to thank everybody around the table for being such great colleagues. I'd like to thank you investors for your trust in us. You continue to show that you believe in our company, and I'd like to thank you for that. I'd like to thank the Board of Directors, our Board of Directors for supporting what management wants to do, but mainly I'd like to thank each one of this -- each one of the -- company employees, each one of them makes this company a great company it is, and we couldn't do it without you. Have a great morning. We'll talk soon. Thank you, guys.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.