Q2 2022 Delek US Holdings Inc Earnings Call
Delek has a long history of returning cash to shareholders.
And we are committed to continue.
I want to highlight several things we have done to maximize returns.
This year, we accept expect to return around $135 million through a combination of three avenues.
One special dividend of 20.
<unk> announced on June 21st.
Second we announced a 20 share regular dividend and third share buyback, including 64 million.
Completed in first quarter, and additional $25 million to $35 million.
Expected in Q3.
On the top of the $135 million.
We're evaluating additional buyback during Q4.
During the quarter, we generate significant free cash flow and use the opportunity to improve our balance sheet by building, our cash balance to over $1 2 billion.
On June 1st we closed on the <unk> acquisition.
I would like to welcome the <unk> team to the Delek family.
This is an important step in our strategy to make detailed independent and less reliant on VK.
This transaction increased our third party revenue.
Expand our product mix into natural gas and water.
And widened our footprint into the Delaware.
Yes.
Finally, the macro environment for our refining has improved.
And the outlook remains robust.
I look forward to meeting many of you in the upcoming months.
I want to thank <unk> for many years of leadership and Mentorship and with that I will turn it over to Todd.
Thanks have a ago net income was $361 8 million or $5 five per share.
On an adjusted basis for the second quarter of 2000 to Delek U S had net income of $314 5 million or $4 40 per share compared to a net loss of $33 9 million or <unk> 46 per share in the prior year period.
We had record adjusted EBITDA of $518 million in the second quarter compared to $46 million in the prior year period.
The increase was attributable to the refining segment were dramatically improved margins, coupled with strong operational performance allowed us to achieve record refinery utilization rates and earnings.
On slide four we provide a cash flow waterfall.
In the second quarter of 'twenty, two we had positive cash flow of $559 million from continuing operations, which includes a working capital benefit of $7 million.
Regarding cash returned to shareholders, we declared a special dividend of <unk> 20 per share on June 21 that was paid on July 20th.
Earlier this week the board approved the reinstatement of a regular quarterly dividend of <unk> 20 per share that will be paid on September six to shareholders of record on August 20 <unk>.
Finally, the board increased the share repurchase authorization by approximately $170 million, bringing the total authorization to $400 million.
During the third quarter, we expect to commence the program with estimated repurchases of 25% to $35 million.
Slide five highlights our capitalization.
We ended the second quarter with $1 $24 billion of cash on a consolidated basis and on a consolidated basis, we had one $5 7 billion of net debt.
Excluding net debt at Delek logistics of 151 billion.
We had only $65 million of net debt at Dk as of June 32022.
With that I'll turn the call back over to Blake.
Thanks, Todd on slide six we provide third quarter guidance for modeling purposes operating costs are forecasted to be in the range of $185 to $195 million, which reflects.
The ongoing impact of elevated natural gas prices, the strong utilization rate outlook and minor maintenance expenses I would like to highlight that G&A expenses were elevated in the quarter, primarily due to bonus accruals for the annual incentive plan.
Closing costs associated with the <unk> acquisition.
The step change in bonus accruals was a function of a material increase in the forecasted profitability of the company for the year.
And this expense is expected to normalize as reflected in our third quarter guidance range of <unk> $67 million to $72 million.
Finally interest expense guidance of $46 million to $50 million for the quarter reflects the consolidated impact of detailed debt, which reflects a full quarter impact from the <unk> acquisition that closed in June .
During the second quarter, our total refining system crude oil throughput achieved a record of approximately 295000 barrels a day in the third quarter of 'twenty two.
Oil throughput is expected to average between $285 and 295000 barrels a day.
Approximately 96% utilization at the midpoint on slide seven capital expenditures during the quarter were $60 million.
Full year 22 capital program is now expected to be in the range of $290 to $300 million on a consolidated basis.
This factors in the earlier than anticipated closing of the three bear acquisition and additional growth in our Permian gathering business, where we continue to see strong producer demand with.
With that operator could you. Please open the call for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset.
To withdraw your question. Please press Star then Tim.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Carly Davenport with Goldman Sachs. Please go ahead.
Hey, good morning, Thanks for taking the questions today and great to hear you back on the call on the call. So just wanted to start out on the demand side.
We've seen some noisy start coming in from the weekly data. So just wanted to get a sense of what youre seeing from a real time demand perspective across your system, particularly for gasoline, but commentary on on the other products would be helpful as well.
Yes first of all <unk> had two heavy on Dakota swim and we can meet soon so I will start and Blake. We continue we see solid demand on our system both on the retail side and on the wholesale we have no issue placing bills.
We see a robust.
Here recently reflect a dramatic decrease we are not at all seeing that in our system quarter to date, we're actually seeing an increase year over year in <unk>. So I think.
Great. That's really helpful. And then the follow up with just around capital returns, you've obviously had some positive updates here around the regular and the special dividend as well as increasing the buyback authorization I guess as you think about the back half of the year and into 2023 do you expect this focus.
Mentally to largely be on the buyback or is there potential to raise the regular dividend or even consider incremental specials.
So I will answer the question a bit more journalism.
And obviously, it's too early a bit too early for me to give a specific number for the second half of deal, but I would like to give some.
Guidelines will highlight around it so we need to look at cash holistically between cash is the dividend.
And we as you probably saw have done the $400 million dollar approval of the buyback for a reason right.
And we see.
Much value into some of the above and we are exploring.
<unk> and ways to deleverage debt.
Appreciate that.
Thanks Carlin.
Our next question comes from Manav Gupta with.
Credit Suisse. Please go ahead.
Hey, guys.
All regions showed material improvement, but Doug noticeable improvement at cross capture.
Very good capture compared to I mean, you have been showing improvement on a consistent basis, but this was off the charts. So help us understand exactly what you're doing over there which is delivering these excellent results.
Yes.
Good morning, Manav, it's Todd.
So a couple of things are happening at krotz that.
We've done a good job over the last couple of years setting it up for the success that it is having right now.
One is they were incredibly strong fuel margins on the colonial pipeline driven by demand in New York and under supply out of northwest Europe into that market.
As you know we had a project a number of years ago to build an alkylation unit alkylation values traded at massive premiums during the quarter relative to alternate disposition even in premium gasoline.
We have also a pretty significant exposure to the distillate side of the barrel there.
Via our jet make.
And in addition to that we have our yield gain.
Where every barrel that comes in we are actually yielding over 100%. So you put all those together and that really makes <unk>.
<unk> brings a powerful.
A powerful refinery during kind of the margin environments that we've seen over the last couple of months.
That we think will continue to see on a go forward basis, albeit slightly lower than.
The levels that we saw during Q2.
And the second question would be you're seeing E&P companies raise the capex youre seeing people basically trying to grow.
In the Permian, So I just want to focus on not Brent.
I wanted to focus more on on Permian versus Brent spread then Bren, then WTS versus Permian and how do you see that spread between Brent and Permian crude widening.
This additional rigs come in as the production growth and I'll leave it there. Thank you.
Yes, sure Manav, obviously right now we're still in a situation, where we have excess pipeline takeaway capacity.
We believe that based on the growth that we're seeing on our system and to your point the increasing capex that number that producers are messaging during their earnings calls that will continue to see robust growth in the Permian, we don't see a lot of newbuild projects, if any coming to the table. So our view is that by.
At the time, we get to <unk>.
Late 'twenty three early 'twenty four we should see that differential continue to widen out.
Right now if you look at the Midland MH.
Spread in 'twenty four it's about $1 25.
But Brent is trading significantly over that so that.
Spread is pretty pretty robust and pretty wide and we're obviously ideally situated to take advantage of that with our ownership stake in wink to Webster and the <unk> gathering system that we've built out over the last couple of years. So we feel good about our position and we think that as we move forward, we will have ample opportunity to reap the rewards of the hard work that we've done.
Thank you guys and <unk>.
Thanks Manav.
Your next question comes from Roger read with Wells Fargo. Please go ahead.
Yes, Thank you and good morning.
And.
I missed my chance I guess in the last quarter. So I will say thanks for everything over the years and as you said.
Maybe a temporary goodbye and not a permanent one in terms of seeing year round.
Yes.
Maybe you can just get into the call and to follow up on Manav question about.
Krotz Springs, and my apologies to U Z for back at the time you acquired.
Our friends.
We view the crops should be shut down I guess pretty much proves opposite on that.
The question I have on the yen. It is if we look at some of the dislocations in Q2. They were on the distillate side Q3 on the colonial they seem to be on the gasoline side. So should we expect potential for crocs to again outperform versus the rest of the Delek system.
Hey, Thank you for that.
For the question.
So very optimistic about.
We think it's well positioned.
High oil price and the financials. So the answer is yes, we have available to think about Cogs and.
And Roger I would just add one thing too we can't speak for where peers are doing but I think in the industry. What has happened is there is a strong demand pool globally and so a lot of barrels are being exported that would normally have flowed through colonial and that is allowing us to receive better netback through the system. So I think thats a contributing factor as well in addition to what Todd had mentioned earlier.
Okay. That's helpful and then.
Just kind of asked earlier, but I'm just a little bit curious as you look at the overall balance sheet structure at Gatwick.
Gatwick inclusive of decay al is there an optimum debt structure I mean granted you've taken a step up with the <unk> acquisition, but is there a goal to take that to a certain level of EBITDA in aggregate level of debt just how should we think about that.
Over time.
Hey, Thank you all thank you for the question and obviously a bit.
<unk>.
Related to the first answer I give we look at the cash.
Yosemite sources holistically between there.
<unk> cursed with shareholder dividend.
Buyback and obviously, the net debt and obviously, it's a bit too early for me to be a specific number but.
Lastly, we are looking on that extensively and as long as the refining.
Outlook will remain robust and the economy will be stabilized.
And we are optimistic on both.
Have more upside on that.
Well, let me, let me ask it slightly differently.
Yeah.
With the balance sheet you have now following an acquisition would you want to reduce debt before the next acquisition or a big step up in Capex I'm, just trying to kind of understand.
The overall corporate structure on the balance sheet side like any sort of broader goals.
Yes, absolutely.
Our goal is to reduce the debt level and we're going to do it some of that in Q3 and going forward. There later on this year. So the answer is yes.
Okay. Thank you.
Okay.
Yeah.
Your next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning.
You've tried to kind of a unique path here on the midstream side still pushing distribution.
Distribution growth at a time when many of your peers are either not growing or distribution or even rolling up their mlps.
And looking at the yield it doesn't really feel like DTA all trades at a premium. So I was hoping you could talk through that strategy do you intend to still continue growing the distribution of detail and.
What are the next moves there.
Yes, sure. So first of all we see.
<unk> is a growth engine and we have seen that for you than we are able to capitalize on that.
Although.
We don't have any intention to stop the dividend.
Unit Raytheon holds in the future. So we are optimistic on both of them.
Blake I don't know if you want to chime on there give some more color on that yes, Matthew you kind of alluded to the fact that a lot of the peers are rolling them out.
It's a little bit differentiated and unique.
Acquisitions were very third party oriented with about 40% of our EBITDA.
Coming from third parties and we're looking to continue growing that and so I think obviously there is a leverage component where leverages moved up but I do think we are experiencing free cash flow and.
And we should be in a position to continue distribution growth, we've committed to 5% growth. This year and obviously, we're not in a position to guide for next year, but.
38 quarters consecutively of increase in distribution and I think thats a long track record we look into to continue.
Sounds good and then you had a nice improvement in the overall refining capture rate in Q2 versus Q1.
Is there anything that we should be aware of for Q3 or do you think you can hold onto these capture a gain this quarter.
Yes.
Sorry, Matthew it's Todd Yeah, I think.
As we've talked about over the last couple of quarters, we've done.
A lot of proactive maintenance, we took this strategic strike.
Tyler with a view that margins were going to be improve albeit not to the level that they've reached in Q2, but we set ourselves up very well because of our view to be able to run to capture the margin environment that has materialized. We don't have any major work planned.
In the quarter and we feel very good about the levels that we've been running obviously up towards the upper end of our range historically and as a result of that we think that that will continue on a go forward basis.
Terrific. Thanks.
Our next question comes from.
Hi, Ken.
Bank of America. Please go ahead.
Hey, good morning, it's can lay out you may need from bank of America.
Thanks for taking my question here.
Question is just a follow up on <unk>, Brent. So I'm wondering what you guys think about the current spread whether it's structural or a response to the SPR releases that are continuing to lead the turnaround season.
On a related note can you give any color on whether the SPR provided a benefit of crop.
Yes, sure Clay, it's Todd again.
Start in reverse order.
When we looked at this most recent SPR release.
That is from.
Sorry August 15 through September 30.
We were involved in the bidding, but as we suspected the values that cleared that market were well above what we would be willing to spend.
Relative to alternative barrels.
So we werent a winner in that and that information is public obviously at this point.
So we think though the benefit is those barrels moving offshore give us access to barrels that are currently onshore and we're able to backfill.
Without having to worry about some logistics issues that you see with the SPR.
In regards to Ti Brent.
The spreads obviously blown out quite a bit.
We don't believe that as a result of the SPR release, we actually believe that as a result of some things happening in northwest Europe were continuing to see incredibly high natural gas prices in the range of $55 to $60 minimum btu.
As a result is causing European refiners to continue to shed.
Sour barrels and searches sweet barrels that's put a very significant bid into the dated frontline.
Market, which has been as high as seven to $10 premium relative to the Brent marker. So we feel like it's much more of a pull out of Europe , that's causing Brent to perform versus Ti as opposed to ti being pushed lower because of SPR releases, which again are largely moving offshore so hope that answers your questions.
<unk>. Thank you My second question is a follow up on the buyback first off congratulations on getting back to this point, it's been a volatile couple of years.
I want to try and understand your Kathie Lee and I saw the guidance for Q3 of $25 million to $30 million, but it feels like you could do more given the shape of the balance sheet at least at the dk level and it doesn't appear like you guys now have a lot of constraints here.
Thank you I think it's a great question.
That's what the highlights I would like to give them my first answer.
Our time to smooth the buyback program not to make it on one time, that's part of the reasoning that <unk> seen this quarter that we got from the boat to go all the way to $400 million. So.
Obviously, if the market continue as it looks like and the economy is still as we think it will.
Obviously continue with that buyback and Longview.
Got it I appreciate that if I could sneak one more in here just a housekeeping question on refining Capex look second half loaded can you just remind us of any planned work you have.
Leave it there thank you.
Clay.
The bottom line is is definitely a ramp up.
To get to the full year spending so it's roughly a $100 million per quarter that youre seeing we have some minor maintenance that we're doing in the second half of the year, but basically what we've indicated all along is that theres no major turnaround activity for this year. So obviously you can see the throughput guidance for <unk> and.
We will give <unk> guidance once once we have results next quarter.
Great. Thanks, Mike.
Yes.
Our next question comes from Jason Cable with Cowen. Please go ahead.
Good morning, Thanks for taking my questions.
First one is an open ended one for Avago and I just wanted to get your thoughts as you step into the big seat from.
Taking over for Uzi, what your priorities are for the company in and where you see the strategic path for it.
Over the next few years and I have a follow up thanks.
Yes.
First of all thank you for such a nice question.
My first priority as I stepped into the.
The job of around six weeks ago will spell through loan to know the people better to visit the asset and I was extremely impressed by both the vacation in the lab that people have for the company and how much everyone wants them to be successful in great company.
We are so I was very encouraged to see many people most of the assets.
Great.
Obviously until we can prevent the holistic strategic plan, it's going to take a bit of a bit more long.
More time, but I will give one conclusion, we have so far right. So we believe that the some of the policy is not walking.
And we are exploring ways, how to unlock the value there.
Okay.
Okay understood and then the second one is.
Just on the QQ numbers it looks like Opex for the quarter was a bit high I think $45 million higher than where our guidance was.
Can you just discuss the factors that that.
Drove that and if you expect any of those to repeat in <unk>. Thanks.
Hey, Jason So for one let me just mention obviously natural gas prices were elevated so that was a contributing factor. The second pieces, we hit record high utilization rates. So as you know the more you run the more you consume so that's a.
An element as well the final pieces there was an element of bonus accrual that actually landed in opex as well. So we're giving guidance for next quarter, which is in the slides.
That does contemplate ongoing elevated natural gas prices.
So it does roll over a bit though as you can see in the guidance 185 to 195.
Great. Thanks.
Okay.
Mechanics, you'd like to ask a question. Please press Star then one our next question comes from Paul Cheng with Scotia Bank. Please go ahead.
Alright. Thank you good morning, guys.
Thanks, Paul.
And good morning, even though that we already say congratulation. So maybe let me add a final congratulation on the semi retirement I don't think that the full retirement right.
I'm sure that will come of course, and senior you took way too young debt to 40 with tide.
Adjusted OIBDA guidance.
That you are the one that took us public.
So we know each other now 17 years 16 years.
Far more than that.
Yes.
Oh, yes.
In 2006.
<unk>.
Hey, Bob.
Loan yet yes.
Quite yeah, Todd player time have been a quick one.
We missed you.
And that also let me congratulate our repo debt to be <unk>.
Conference call.
Andy.
Yes.
I think yes.
May I have to apologize personally wanted to go back into the capital return framework, but it's more on a high level.
Some of your peers that have a sort of a.
Paul Miller.
Is that somewhat of a long medium or longer term Paul okay.
What I guess a.
$40 50.
40, 60, or 50 50 in terms of the cash flow will be returned back to the pits.
Yes that does pose a rebuild you think that may be applicable for the company on that.
The economic lifecycle pool.
Dk is much different than some of your larger peer and so you don't think this Kyle.
Mystic approach it the way you approach.
That's the first question.
Okay. So.
I would like to touch at this point, but I'm glad that you asked it again, so we look at the policy now on cash holistically between share repurchase.
Bye and buyback, obviously dividend, we have the regular dividend and the special who doesn't know obviously.
That which is important part of the component. So we are looking on that holistically.
We are not I'm not ready just yet to give guidance for the second half, but I am saying that again that as long as the market is going to be robust and we believe it when we would see more upside on that side.
Hello.
What you said I think our Ricoh and my question is that somewhat.
Say, okay. They want to return in the long haul or medium term say, 40% or 50% of the cash flow and then the west will be reinvesting in the business.
A formula based approach in the cash return on the cash flow the one year approach for the company and yet known.
Why not.
So Paul this is Blake, let me just quickly say for one I think we're a little bit unique in terms of a lot of the companies that do have these specific frameworks are much larger more mature companies, we are growing company the.
The second piece is that we have.
A huge midstream component compared to others and there is a leverage component to that that is a little bit differentiated compared to refining. So we have not wanted at least until this date to box ourselves into a specific number or framework, obviously, all the Gulf getting settled in six weeks into the job. So we can evaluate these types of things going for.
Forward, but at this point.
I think it is a little bit unique for us compared to the peer group.
Okay.
With these short question one you guys have now.
Under the FIFO accounting team.
With the only applies slower.
Lower versus the second quarter.
We intent from the accounting standpoint.
Correct.
Lower margin or at least that adverse impact on your reported margin or that the hedging and the inventory movement that you guys own.
With knees at that inventory movement dosing is going to fully offset that and then final need that okay can you maybe share with us.
Wink to Webster the contribution in the quarter and when do you expect.
Opex going to which the full contribution to you.
And how big that contribution going to be thank you.
So Paul on the second piece went to Webster that flows through the equity method.
One item, we arent disclosing specifics around that just given the partnership nature of that but it is progressively ramping up through call. It. The next 18 months or so so we.
Just want to make sure the messaging there is aligned with our partners.
In terms of your question on other inventory and hedging there is a table on the back page youre going to notice back there we had a benefit from other inventory of $40 million that was much more than offset by <unk>.
Hedging realized hedging losses of $113 million. So technically speaking if you wanted to strip all the noise out our EBITDA would've been $73 million higher than what you see.
But obviously, we're trying to work from an adjusted EBITDA basis going forward just to make sure all investors are clean and everything.
Much more straightforward.
Alright, thank you.
This concludes our question and answer session.
I would now like to turn the conference back over to alcohol correct.
Closing remarks.
Thank you so much for the call. Thank you for the <unk>.
The management team around the table to talk so hub, so that the best quarter ever head.
The board of directors, trusting us and allowing us to kind of the company. The best way, we can and obviously in mostly our employees that make this company great everything. Thank you so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.