Q4 2021 Delek US Holdings Inc Earnings Call
Good morning, and welcome to the Delek U S Holdings fourth quarter 2021 conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by <unk>.
Well.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Blake Fernandez.
Senior Vice President Investor Relations. Please go ahead.
Good morning, I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek U S fourth quarter 'twenty, one financial results joining.
Joining me on today's call is there do you mean, our chairman President and CEO Rubin, Spiegel, EVP, and CFO , and Todd O'malley, EVP and Chief commercial officer as well as other members of our management team. The presentation materials used during today's call can be found on the Investor Relations section of the Delek U S website. As a reminder, this conference call may contain forward looking.
Statements as that term is defined under federal Securities laws. Please see slide two for the Safe Harbor statement. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, We report certain non-GAAP financial results.
You 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 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 that is incorporated into the press release on today's call.
<unk> will review financial performance.
Ill cover capitalization and guidance, Tom will cover operations and Capex and then Uzi will offer a few closing strategic remarks with that I will turn the call over to Ruth.
Thank you Blake.
On an adjusted basis for the fourth quarter Delek U S reported a net loss of $44 9 million or a loss of 61 per share compared to a net loss of $204 million or most of $2 77 per share in the prior year period.
Our adjusted EBITDA was $68 2 million in the fourth quarter compared to a loss of $137 6 million in the prior year period.
The second progress of the press release highlight $6 million of after tax tailwind or <unk> <unk> per share items included in the adjusted results.
Page 14 of the release provides a breakdown of inventory hedging and other inventory impacts in the quarter.
On slide four we provide the crest smartwater.
In the fourth quarter of 2021, we had a positive cash flow of approximately $161 million from continuing operation, which includes a working capital benefit of $110 million.
With that I will turn the call over to Blake. Thanks.
Thanks, Ruben slide five highlights our capitalization, we ended the fourth quarter with $857 million of cash on a consolidated basis and $1 36 billion of net debt.
Excluding net debt at Delek logistics of $894 7 million, we had net debt of approximately $467 million at December 31, 2021.
Moving to slide six we provide first quarter guidance for modeling operating costs are forecasted to be in the range of $160 million to $170 million. This reflects the impact of elevated natural gas prices and assumes no impact from ongoing insurance proceed with that I will turn the call over to Todd to discuss operations and Capex.
Thanks, Blake during the fourth quarter, our total refining system crude oil throughput was approximately 279000 barrels per day, reflecting some turnaround activity that was pulled forward at the Tyler refinery.
In the first quarter of 2022, we expect crude oil throughput to average between 275002 hundred 85000 barrels per day or approximately 93% utilization at the midpoint.
The remaining turnaround work at Tyler was pushed to 2023, resulting in no major plant turnarounds for the Delek system in 2022.
On slide seven capital expenditures during the fourth quarter were $66 million. This reflects maintenance at Pilar and initial growth spending on the Permian gathering business.
The full year 2022 capital program is expected to be in the range of $250 million to $260 million on a gross basis. This includes $112 million of spending on discretionary and business development projects of which approximately $59 million resides in the logistics segment.
<unk> associated with gathering in the Permian growth.
Growth capital in the retail segment will be dedicated to a build out of four new to industry locations and the ongoing rebranding of 711 stations I'll now turn the call over to Izzy for his closing comments.
Thank you Todd and good morning, everybody.
The macro backdrop continues to improve and the lack of major turnaround activity on our assets in 2022 positions.
Well to capture the margin environment, we're optimistic on increasing activity levels in the Permian basin, and we see opportunities to grow our existing assets organically.
The portion of the Phase two program a decade unit announced in December .
Therefore today.
This great Optionality to implement additional third program into the future over time, we believe peak sales will underscore the underlying value of <unk> units within the UK portfolio.
As we move into 2022 week with should provide a positive contribution throughout the year.
Finally, we continue to make progress on our ESG effort with a 34% reduction targets and our scope one and two carbon emissions by 2030.
We encourage investors to review our press.
Ability report for a more detailed.
With that operator will you. Please open the call for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Manav Gupta with credit Suisse. Please.
Please go ahead.
Key Lucy and team I think what I wanted to focus on it.
Sometimes.
<unk> is delek leverage too positive crude prices, you'll probably the highest crude beta in the group.
Higher crude prices being inland rigs that differentials.
Also increased the volumes on your midstream infrastructure that you have built and in fact, even your retail business tends to benefit when the app.
Davita is higher in the Permian basin, given the location of the stores.
Looking at what we're seeing today morning. We include is that thing can you help us better understand how this higher crude oil macro overall play in your hands as we go ahead.
Good morning.
<unk> actually said it right.
All aspects all I need to say, yes, but let me let me make it a little broader.
If we see what happened in 2015 2016, we go by history.
Well remember that Thanksgiving day, when the Saudis decided to flood the market.
Sure.
That was the data.
We start to see crude coming down then in <unk>.
Oil prices coming down and then when they changed their strategy.
Producers start to bring rigs back in production went up and that led to our best year. So far.
2017, 18, and 19 of course because differential.
Very strong paying $12 $14.
An overbuild situation of call it 2 million barrels right now.
The.
The producers are saying that theyre going to be disciplined.
August do you think that there will be.
Little more disciplined in the past, but let me give you a point of reference here.
As we know from our own producers and we finished the year with gathering 83000 Boes.
Through our gathering system or the TPG system, we're finishing.
First quarter exiting first quarter.
Increase of 50% over 125000 barrels actually we're gathering more than that.
We speak we expect to be $1 50 by the end of the second quarter.
<unk> continued to grow towards 160 <unk>.
Existing producers with existing dedicated acreage.
Toward the 160 number so all these doubling the production.
In our system.
From existing producers and let me be clear we are talking to others that are not.
In our portfolio as we speak because everybody sees it used to be $80. We start to talk to them. When it was $80 let alone when it's $100 is going to be.
The different game. So deeply do you think is the first thing to enjoy it you will see it immediately in the first quarter then as production will continue to go up.
We expect differentials to start opening up it won't happen in 2022, we don't believe but toward the 2023 or the end of 2023, we actually think that $80 $90 is very very good for Delek Hagen Dazs is overheated.
I'll, probably will come down after some of the event will come down, but youre absolutely correct.
Is going to impact the volume at TPG is going to impact the volume of Ww is going to impact.
Differentials, which we can switch back from.
WT to Midland.
Sure.
Very positive.
Time for Delek.
A quick follow up here.
I know in the past you have been given <unk> crops.
Initially the position of EPA scene, they might not <unk>, but look the world has changed gasoline prices high. So there is a possibility they might actually give you the antibody to bring the price down but just in case they don't.
Would you actually be open to taking a legal recourse for what you believe is rightfully yours and I'll leave it there.
Firstly, it's up to the government.
And I cant explain to myself.
The federal government wants to give away the fair tax of 18.
I don't understand how the.
The other hand is.
Taking too often.
We think that is.
In the past, we got them every year, we think we deserve them across.
Eduardo for sure and probably look at it very carefully and Tyler.
We're waiting for the decisions we are talking to them.
I would say, we're responding to their questions when they come.
I think politically I don't really understand how.
The market.
Is willing to accept this crazy idea, but it is why do you know specifically for Delek I don't know what they will do I know that we feel strongly that we deserve them and we are willing to take any action that is needed.
In order to get them.
Thank you so much as the play at a time.
The next question is from Carly Davenport with Goldman Sachs.
Please go ahead.
Hey, good morning team. Thanks for taking the questions I wanted to just start on capital allocation as we think about where refining margins have been trending can you talk about your capital allocation priorities for the first half of the year here and then I guess what are you looking for or maybe what are the key gating factors in order to consider perhaps a reinstatement of some sort of capital.
Returns program, whether that's via dividend or buyback.
Okay. So.
Good morning for taking the time and thanks for the support I'll take it one by one if you will the first one is capital allocation within the.
The system, we do not have any.
Major turnarounds coming our way during 2020.
2022, we actually took.
Both.
I think 12 to 14 days.
Diluted down for the strike we were very happy that we did that at the time it did cost us.
Or loss profit of around $14 million to $15 million.
Then we did the same thing across just to make sure that we're running through 2022.
That's one of the reasons why the quarter was a little weaker.
Weaker.
We left on the table 20 million, but we saved a major turnaround in Tyler so.
If the current environment continues which.
Let me be clear, we don't want to be overly optimistic yet because the differentials in change yet and we're still in backwardation situation in the Rins are still very high but we see a change in the market, we see the demand coming back and we see our earnings picking up.
So if this continues to be the.
In the case that I don't see any reason.
While we won't look at it very carefully, especially in light of the fact that.
We're back to spending money on growth, especially at the PG side and also other areas.
So.
Free cash flow, we are obviously you see the cash on the balance sheet.
Higher prices are good for our balance sheet.
Any other refiner, we will look at it very carefully during the year.
Great. Thanks for that and then the follow up with just on the midstream side and I. Appreciate all the color you gave on the gathering business. There can you talk a little bit about wink to Webster, how that's progressing through the ramp up process and kind of how we should be thinking about the contribution to earnings throughout the year.
Well similar to what.
<unk>.
Our peers I think we're in a ramp up position.
Okay.
Robust phase I program, our position or above grade.
<unk> up.
We've talked to.
We are starting but let me be clear we're starting to.
To see the oil moving and.
We will ramp it up I don't see material impact on us this year, just because of where differentials are in where.
We collect the fees.
It's still.
I do want to say that next year and the following years.
Or by the end of Nic next year by the end of 2023 will be.
Starting to get close to full utilization and as we said we are.
In our mind, well above the threshold of 15% in that project.
I don't think that the.
In the current environment.
Yes.
Differentiate will stay as compressed because I do believe that.
We do believe that producers will start drilling.
More than what they said so far.
Okay. Thank you.
The next question is from Roger read with Wells Fargo. Please go ahead.
Hey, good morning.
I think the big question I'd like to hit you on I mean granted Midland versus Cushing tends to have more of an impact on you, but if we look obviously the last couple of days, we've had a pretty big separation between Cushing and Brent So Midland obviously discounted versus.
Brent more significantly.
Does that mean in terms of how we should think about margin potential for you and what are your thoughts.
You mentioned earlier right capacity issues in the Permian and say, we're not going to have any blowout differentials there, but I'm. Just wondering if you look across the U S. Some of the issues with moving crude around as well as the export market. How you think about the differentials going forward.
Okay. So.
Let's go one by one here the rule of thumb and we always say is that we think that.
Under this scenario a $15 crack spread without.
Neutral and also Nova acquisition and no Midland Zero zero worry around between 800 900000.
<unk> million dollars EBITDA.
What we call mid cycle.
That's how we look at it we look at it on a regular basis and we think we are pretty much there.
So if we if you start applying the different.
Important to that then.
You will see that the crack is much higher obviously, we still have.
<unk> is a headwind for everybody and also of acquisition in the Midland is still a premium I think it was.
Moving along.
No.
Correct, we'll continue to open up in our mind.
Until something will happen either to the rain or too.
Backwardation in Midland.
We always look at it as you know Roger we spoke about that several times.
On our Midland Brent and not.
Midland.
And I think it is opening up its opening up nicely probably about 50 over the last.
Weak.
So.
That's obviously a positive.
We said that all along that we feel that we hit the bottom.
As a company a couple of months ago or three months ago, and we are on the upswing from the start if you want to say I mean, Roger if you. If you look at the Brent Ti obviously the phenomenon in the front end market that prompts is being driven by what's happening over in the Ukraine right now.
But that has had the effect of pulling the back of the curve.
Wider as well so if you look at full year, you are kind of in that 380 range. So we think that's very constructive for us.
The differentials have continued to be favorable on a relative basis.
We think thats going to lead to even more incremental production on the <unk> system.
Ultimately benefiting the refineries benefiting dk all.
<unk>.
Kind of working into the export market to the extent that there is excess cell.
And Roger It's Blake, let me just add one thing I'm sure you know this but from a sensitivity standpoint, if you assume 95% utilization of the system, that's roughly 100 million barrels a year. So if you just figure every dollar per barrel expansion in the spread that drops right to the bottom line is about $100 million. So I know you probably have that modeling, but just a reminder to you.
That's helpful. Thanks.
Follow up question.
Hey, Chris it's kind of spike in around here and everything but.
Just curious what youre seeing in the way of the demand trends across your system as we think about.
Gasoline distillate and even jet fuel.
I think demand is picking up everywhere.
Even as the pandemic dive not only in the United States, but around the world.
<unk>.
And I say that I think we said it a few months ago.
<unk>.
We expect our 2020 to be.
Very strong year.
Our record year of course.
In terms of several projects I think that.
Things are coming back I don't know what the impact of this war.
We'll be on Europe and us.
So far demand it looks extremely strong.
Alright, thank you.
Thank you Roger.
Next question is from Phil Gresh with Jpmorgan. Please go ahead.
Hey, good morning Uzi.
Just one follow up on the capital allocation front.
So like in the past you've talked about your traffic tens of dividend versus buyback.
And then obviously it probably depends on your own share price, but.
To the extent you would consider something at some point a strong environment.
Lean one way or the other there.
Yes.
At this point, we'd prefer to do the <unk>.
Dividend unless there is an opportunity of something that is.
Really.
Not.
Dislocation in the marketplace, we prefer dividend.
Got it okay.
And then just one cash flow question with the working capital tailwind in the fourth quarter.
Was there anything.
Unique about that.
Reverse in 'twenty, two or is this kind of the right steady state to be thinking about.
Your next year.
Hi, it's Ruben. Thank you for the question well the impact was 110 million, mostly because of a decrease in accounts receivable. There is a timing issue between quarters on some of that.
We'll have an impact on the first quarter, but we still.
Expect working capital to be positive in the first quarter and with events that are happening in the last ammonia for hours. If the pricing that we see are sustainable then that will have an uptick on working capital as well.
Okay got it thank you.
Thanks, Phil.
The next question is from Paul Cheng with Scotiabank. Please go ahead.
Hey, guys good morning.
With the change.
Morning, good to hear your voice.
Alright, thank you.
Sorry, just to it's that.
Historically that you guys focus more on the oil.
And I think that's a July <unk> pardon me.
Do think that sharing and so a correspondingly pumping continue.
Amit.
<unk>.
Yes.
Wait and so.
It's just that you guys want to get in or weighted interest put forward that you'll want to stick to your coal.
The oil and that would link to your integrated we're finding some way to focus.
Well, that's an interesting question Paul.
We our focus is mainly oil, but if it comes as ancillary product to oil.
Producers.
On them to.
I want us to help them with net gas.
We may look at it historically, we haven't done it I think.
We want to think on.
On decade, as a Standalone company long term thats the reason.
<unk>.
Drilling down to the ATM.
Program.
Some units of decades, but as detail will be.
<unk> Standalone company that may be an opportunity for detail to look at.
And that.
So it seems like you are selling down by 1% per quarter.
That's a minimum ownership that teekay wanted to hold or is that not really because you control. The GP. So you don't really need to have any minority.
On the LP ownership.
Paul I think.
The program was designed to initially test the waters and protect our investment in <unk>. We've said publicly 80% is definitely too high we have not defined a specific target, but I think the messaging. We're trying to deliver this morning is that we have appetite to do this program on an ongoing basis.
Through the ATM, we're basically able to do about 1% per quarter and I think the intention of course pricing dependent but the intention would be to continue to implement this each quarter. So call. It 4% a year. So I think that answers your question.
Okay.
On the.
Last I would say.
You say this year and maybe even next year it doesn't have much impact.
The poor Jeff Watts.
That's fine Paul.
Contract fully on the on the one it so.
Sure.
Still we see the revenue on that and be able to book that cash.
Okay.
I want to be clear the product it is fully booked as adjusted.
It's fully subscribed, but there is a ramp up.
Period and in the ramp up period, we want to be conservative because we have some shippers already signed up for that which are part of our business already so.
During the ramp up period, which is the initial year, we don't see.
We'll probably see a few millions, but we won't see the full magnitude of the 15% to 17% minimum that we say to our will be our threshold of 15%.
And usually what's let's assume that by end of next year that you would be in full.
Throughput for one way what would be the contribution to you at that time.
We said that we are well above our 15% threshold and the investment is around $350 million.
Okay.
And that final question.
Maybe this is for <unk>.
If we look at year end 2021, your current liability cat jumped by about $1 2 billion versus 2020 is that increases or we data too.
Sharply higher core.
Core clients at all what that USA the way to how you manage working capital and that to allow you that to be more efficient.
Being able to fund the operations better.
So.
What's causing that big chunk or that shot.
Sharply.
The working capital basically exclude cash right now is about a negative dollar versus debt by the end of.
2020 is about 8000 400 million only.
Paul This is.
I'm getting a little technical but we'll follow up with you I'm just going to tell you that.
As you know because you took us.
And through this journey.
Delek and also most refiners when prices go up.
This is where net.
Positive working capital you know at the nine or so in order to tell you where the cash is by the end of the year, we need to put them all together.
We assume price of crude.
Regardless of profitability profitability at the size of that.
And.
Daylight today will jump or cash.
Dozens of millions of dollars if it stays like that.
So it's very difficult to predict that without saying what is the price of crude.
Okay.
I'm actually not asking for forecast I'm, just saying looking at the end of this last year 2021 versus the end of 2020.
A big change I, just wanted to see what that.
So the gentleman behind changing the commodity prices or Thats also a change in the way how you guys manage working capital.
Yes.
Yeah.
It's mostly the commodity price, but if you need more color on that we will get back to you.
Okay. Thank you.
The next question is from Doug Leggate with Bank of America. Please go ahead.
Hey, Good morning, guys. This is clay on for Doug Thanks for taking the question.
My first question is I wanted to follow up on the dividend and this is twofold.
Question is would you consider reinstating at the same quarterly level prior to the cut and if not can you talk to us about how you think about right sizing that dividend, perhaps in relation to decay I'll now give you. An example, so MPC.
Dividend is basically covered by the distributions from MPLX. So I'm wondering if you would use your MLP and a strategically similar way.
Firstly good morning, Thanks for taking the time.
I want to be clear.
We said it all along we're not paying dividend out of boring.
And.
We.
At the same time, we feel that our shareholders deserve it.
As soon as we come back from the pandemic.
We're inching towards that.
Periods of time.
We really don't want to.
Go back and change.
Our policy.
If the market changes so we were going to take a prudent.
Okay.
Pace, if you will towards the dividend.
We feel that the cash flow is very.
<unk> is very strong.
Especially coming out of the pandemic.
We want to be careful not to hurt so.
MPLX move to profitability or I'm, sorry in MPC move to profitability, two or three quarters ago.
Awesome job.
Given.
Giving money back to shareholders and we want to watch it and we'll probably try to do the same thing.
Got it it sounds like it's still under a lot of consideration.
My second question is on maintenance capital.
The industry has focused on preserving cash during the pandemic, which is completely understandable and you guys have pushed off a major turnaround from.
And Tyler from 'twenty to 'twenty three.
So I'm wondering whether 'twenty three will be a year, where you return to normal maintenance capital levels and if you can remind us what that number is that would be appreciated. Thanks.
Yes, so going into 'twenty three obviously, what we've done is push out the Tyler turnaround from 22 to 23, So we will presumably have that turnaround activity there and.
To give you the context historically, we've talked about maintenance capital plus turnarounds being somewhere in the $150 million to $200 million range. So obviously, we'll try and finesse that and we're not in a position to start getting into the fine tooth coming of that yet.
That's historically, what we've said and again no turnaround activity. This year opens up the opportunity for some growth and then as we head into 'twenty three we probably we will have that turnaround in Tyler.
Great I appreciate it.
Okay.
The next question is from Dan Kurtz with Morgan Morgan Stanley . Please go ahead.
Hey, Thanks, good morning.
Wanted to follow up on the DTA unit sale program. So I appreciate the color on the 1% per quarter at the market.