Delek Logistics Partners, LP (DKL) Q2 2024 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Joel, 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 speaker's remarks, there will be question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Robert Wright, Deputy CFO. You may begin.

Good morning, and welcome to the Delek Logistics Partners second quarter earnings conference call. Participants joining me on today's call will include Avigal Soreq, President; Joseph Israel, EVP Operations; Reuven Spiegel, EVP and Chief Financial Officer; and Odely Sakazi, 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-K and quarterly report on Form 10-Q filed with the SEC, along with the press release associated with this call. 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?

Thank you, Robert. Delek Logistics Partners had another record quarter. We reported $102.4 million quarterly adjusted EBITDA. I am pleased with our continued performance. We have made several announcements today. 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 amend and extent of the contract between DKL and DK. The extensions remove an overhang on the DKL unit. It moves away from a month-to-month to contract terms of up to seven 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 Permian position. Second DKL announcement today is the investment in the new gas processing plant. 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 2025. The last transaction DKL announced today is the acquisition of H2O Midstream for $160 million of cash and $70 million 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. As such further expand our capabilities to be a comprehensive provider of midstream services in the Permian Basin. Once this transaction are complete in the first half of 2025, 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 unitholders. We are excited about the announcement that we have made today and the opportunities ahead of us. I want to welcome the H2O team to the DKL family and wish them continued success and good luck. I will now hand it over to Reuven.

Thank you, Avigal. As Avigal 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 a transaction we have announced today. We are also managing our leverage, which has improved to 3.81 times at the end of the second quarter of 2024 from its high point of 4.84 at the end at the end of 2022, and 4.34 at the end of 2023. Moving on to our second quarter results. The second quarter adjusted EBITDA was $102.4 million, compared to $92.8 million in the same period of 2023. The distributable cash flow was $68 million and the DCF coverage ratio was 1.32 times. For the Gathering and Processing segment, EBITDA for the quarter was $54.7 million, compared to $52.6 million in the second quarter of 2023. The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets. Wholesale Marketing and Terminalling EBITDA was $30.2 million, compared to $28 million in the prior year. The increase was primarily from higher terminal and utilization. Storage and Transportation EBITDA in the quarter was $16.8 million, compared to $15 million in the second quarter of 2023. The increase was mainly driven by higher storage and transportation rates. And, lastly the investment in pipeline joint venture segment contributed $7.9 million this quarter compared to $7.3 million in the second quarter of 2023. Moving on to capital expenditures. The capital program for the second quarter of 2014 was $10.2 million. Most of the spend in 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 million to $100 million in the second half of 2024 on new processing plant. With that, we can open the call for questions.

Hi. Good afternoon guys. Thanks for the time. First question is just on the H2O Midstream acquisition which looks very attractive. Just wondered, maybe can you talk a little bit about -- you mentioned here about the new full suite of services how that improves sort opportunities. I'm just wondering how that will improve as you have future customer opportunities. And then secondly, you all talked about the potential near-term costs and revenue synergies. I'd love to hear maybe more about that.

Absolutely, Neal. So, three aspects to that. One, 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 operational are on top of each other, so you can be very efficient on the way you run your operations. And the third, this infrastructure can be relevant for both services. So, this is accretive -- very accretive deal for us and it is extremely synergistic.

No, I would agree. And then secondly just on the new Delaware gas plant. What could the timing be? I know maybe jump in again a little bit on this one, but I like that -- I think there is a 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?

Yes. So our gas plant is completely synergistic with the current gas plant we have. We said that we're going to complete the second -- in the first half of 2025. And it's already been nicely subscribed. Odely, I don't know if you want to add into that.

Yes just a little bit to your comments, Neal. To be honest, right now, we already have the associated need for additional capacity from 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 Avigal mentioned. So we see that timing pretty much as soon as possible from our stand.

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

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

Hi. Thanks for the question. I just wanted to touch on the $55 million to $85 million EBITDA range you provided for the transaction this morning. I was wondering, if you could talk about some of the assumptions for high end versus the low end of that range. Is mostly dependent on some of the H2O Midstream synergies? Or are there maybe some other factors under consideration there? And then should we expect that to kind of be a good run rate for 2025? Or is that ramping overtime?

So there are three main components around that, right like we outlined. One is the DK contract [indiscernible] Second is the W and third is the H2O Midstream and fourth the gas processing plant. What I think the majority of that is not coming from synergies is 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.

Okay. Great. That's helpful. I was just wondering, if you could provide a little more detail around the funding expectations for cash component 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, I'm interpreting that correctly and if so, maybe get a little more detail around how that might play into the deconsolidation priorities of the DK.

Yeah. Absolutely. So there are units that are changing hands, but the net amount is not big between the companies. So it's like we exchange value from one company to another and we got it pretty tax efficient. So that's good news. So we don't need to pay a lot of attention into that part the equation. What we basically did and you can appreciate that, I'm sure, we put the right asset under the right ownership. Put W to W where it naturally belongs and a exchanges for a value that belongs to the refineries.

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

Thank you.

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

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

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