Delek US Holdings’ (NYSE:DK) Q2 earnings report paints a multifaceted picture of a company grappling with operational challenges while showing strength in specific sectors. With a total throughput of 295,000 barrels per day, and adjusted EBITDA of $201 million, the company has demonstrated some positive signs such as a resurgence in demand and reduced recessionary pressures. However, the company’s underperformance relative to the S&P 500, a concerning adjusted operating earnings growth rate, and inconsistencies in dividends hint at potential underlying issues. The non-GAAP EPS of $1.00 beats by $0.33 and revenue of $4.2B beats by $1.08B, offering some encouragement. But as this analysis argues, a more cautious view of Delek’s overall financial health is necessary, considering the blend of promising trends and persistent challenges, before endorsing it as a favorable investment opportunity.
Delek US Holdings, Inc. is an integrated energy company in the U.S., operating across three segments: Refining, Logistics, and Retail. The Refining segment, based in Texas, Arkansas, and Louisiana, processes crude oil into various petroleum products, while the Logistics segment manages the transportation and storage of crude and refined products, including water disposal and recycling services. The Retail segment, primarily situated in West Texas and New Mexico, owns and leases convenience stores offering fuel and other goods, often in collaboration with brands like 7-Eleven. Headquartered in Brentwood, Tennessee, and founded in 2001, Delek’s client base spans oil companies, refiners, distributors, and governmental entities.
Delek US Holdings’ Q2 Earnings Highlights
In terms of raw numbers, the company’s Q2 reported a total throughput of 295,000 barrels per day. This contributed to $201 million in adjusted EBITDA, a development attributable to the prevailing market environment which, per management’s outlook, revealed some positive patterns for the quarter.
Case in point, they noted diesel prices at nearly a five-year low, while gasoline has similarly bottomed out. Concurrently, they’ve pointed out a resurgence in demand, indicating a possible shift in market dynamics. Also, the recessionary pressures that prevailed in the first half of the year appear to be diminishing, albeit gradually. This change has also favorably impacted the COGS spread. An anticipated heavy turnaround season in Q3 and the compression of heavy-light differentials are additional factors that appear to be working in the company’s favor.
In Tyler, throughput reached 77,000 barrels per day, yielding a production margin of $13.87 per barrel. Big Spring’s results were hampered by unexpected maintenance but still managed a margin of $11.55 per barrel. Meanwhile, Krotz Springs reported 83,000 barrels per day with a margin of $6.21 per barrel.
Investors will also note that the system as a whole is benefitting from improved gasoline crack spreads and reduced RVO costs, evidence of a nimble adaptation to market fluctuations. Furthermore, Delek’s strong asphalt and wholesale marketing contributed an additional $82 million to their Refining segment earnings. Krotz Springs alone generated approximately $30 million of this value, driven by sales in light-cycle oil, high sulfur diesel, and alkylate.
Also notable is the expansion in the Permian Basin. Here, the Midland Gathering System volumes more than doubled from a year prior, which manifests in robust operations and growth.
And lastly, the company reported adjusted net income of $65 million, adjusted EBITDA of $259 million, and cash flow from operations of $95 million. A concerted commitment to shareholders is also evident, marked by $40 million in buybacks, $15 million in dividends, and $10 million in distribution payments.
You’ll notice very modest growth in the share price over the medium-term, starting at USD 24.60 and ending at USD 27.76. While this represents a growth of roughly 12.8% over the time span, it has certainly underperformed compared to the benchmark index (S&P 500 Index) which displayed growth of more than $22K, compared to DK’s $13k (based on an initial $10k investment for this time period).
The annualized Rate of Return without dividends for DK is only 1.60%, whereas the S&P is at 11.01%. And the dividend history over this period has been anything but consistent, displaying wild fluctuations.
Yet, despite the fluctuations, the average growth rate of dividends stands at 9.21% over the 5-year period, with a compound growth rate of 5.84% suggesting that there has been some underlying growth potential within the company, albeit in a somewhat erratic manner.
When comparing the total growth and dividends, Delek has an overall compound growth of 3.96%, still lagging behind the S&P’s 12.28%. This continued underperformance relative to the broader market may be seen as a concern for those looking for significant capital appreciation.
DK’s blended P/E ratio of 6.43x (see data below) is notably below the industry standard which some investors may see as a sign of undervaluation, but I’m inclined to take a more cautious view.
Now, let’s turn our attention to the adjusted operating earnings growth rate, which stands at a concerning -5.84%, that sends a clear signal: Delek’s core business operations are facing challenges.
I imagine that the dividend yield of 3.39% might be a bright spot in this data set for income-focused investors; however, it should be analyzed in conjunction with the EPS Yield of 15.54%. In all-to-often investment scenarios where a high dividend yield may be seen as a generous return for shareholders, but it could also reflect a deliberate attempt by the management to appease shareholders within other less-than-optimistic financial figures.
Risks & Headwinds
Starting first with Seeking Alpha’s Growth Grade, DK’s overall rating is marked as an F, well below par for the industry which highlights systemic issues within the organization’s growth trajectory, likely rooted in core operational and strategic shortcomings.
Revenue Growth, the lifeblood of any business, shows both Year-over-Year (YoY) and Forward (FWD) grades of C and D respectively, reflecting negative deviations from both the sector median and the 5-year average.
EBITDA Growth, however, presents an interesting paradox, with a dismal YoY rating of F, contrasted by a highly positive FWD rating of A suggesting that though the company has struggled in the past, Delek’s enhancement strategies are coming to fruition.
But then the abysmal rating for EPS FWD Long Term Growth (3-5Y CAGR) at F and -154% signals bleak prospects for earnings growth.
Circling back to the Q2 and drilling further into the operational challenges, you’ll notice specific areas impacted the company’s production margin. The unplanned events (mostly due to a “diesel hydrotreater catalyst change and vacuum unit maintenance”) in Big Spring led to a negative impact of $4.30 per barrel, while an unexpected power failure in El Dorado was responsible for a $1.50 per barrel detriment. The company has likely found it difficult to mitigate these unplanned factors, given their unforeseen nature.
From a broader financial perspective, Delek US’s second quarter displayed a net loss of $8 million or $0.13 per share. The adjusted EBITDA reduction from the first to the second quarter was predominantly influenced by suboptimal results in the Refining segment. This decline correlates with the decrease in crack spreads, with the Gulf Coast 532 crack averaging at $25.54 for the quarter, a fall from the $32.55 observed in the initial quarter.
Within the company’s financial structure, the net debt grew by $79 million during the quarter, accompanied by a cash draw of $43 million. Inventory draws’ timing and capital expenditures totaling $58 million were underscored as significant contributory elements.
Lastly, the company’s forecast for the upcoming third quarter presents its own set of financial difficulties. The anticipated operating expenses, ranging between $210 million and $220 million, will include costs associated with mechanical integrity work. With net interest expenses expected to lie within $80 million to $85 million, the persistence of financial pressures seems to be a near-term certainty.
Based on the analysis, I would rate the stock a “hold.” While Delek’s Q2 shows promising throughput and positive signs in various sectors like adjusted EBITDA and anticipated factors working in favor, the company’s underperformance relative to the broader market, a concerning adjusted operating earnings growth rate of -5.84%, inconsistencies in dividends, and negative grades for revenue growth indicate potential underlying problems. The blended P/E ratio also suggests undervaluation but given the more complex picture of operational and strategic challenges, I believe that a cautious approach is warranted to observe how these factors play out in the coming quarters before taking a decisive “buy” action.