Q3 2022 Delek US Holdings Inc Earnings Call
Begin with comments from all the goal then Ruben will review financial performance and capitalization Todd will cover guidance in Capex and then we'll turn it over to Q&A with that I'll turn the call over to off goal.
Thanks, Blake and good morning.
We had another quarter of strong operational performance.
Youth two consecutive quarters of record refinery utilization and solid results, excluding inventory FIFO movement.
Recently, the outlook for downstream energy industry is positive.
I'm proud of the team's execution and the focus on safety and reliability.
Switching gears to talk about the priorities, we laid out last quarter fifth returning cash to shareholders.
We expect to repurchase $75 million to $100 million.
Of our outstanding shares during Q4.
We increased the regular quarterly dividend to <unk> 21 per ship in the third quarter, we exceeded our share repurchase guidance with a total of $40 million of buybacks.
<unk> focus on capital allocation.
We plan to retire what between $100 million to $150 million of debt during Q4.
This reduces our debt level and maintain a flexible balance sheet.
Third we started our initiative to unlock the sum of the parts value of our assets, we hired a head of corporate development and engaged banker to advise us on strategic options.
We will communicate our plan to the market once complete.
After one full quarter in my role as CEO I continue to be impressed with the depth of our team and the strength of our operation I am excited by the many opportunities we have in front of us to deliver additional value to our shareholders.
And remain focused on execution on our key priorities.
I look forward to updating you over the upcoming quarters with that I will.
Turn it over to open.
Thank you Abigail.
Net income was $7 4 million or <unk> 10 per share on an adjusted basis for the third quarter Delek U S had net income of $1 1 million or <unk> <unk> per share compared to net income of $3 6 million or <unk> <unk> per share in prior period.
We had adjusted EBITDA of $136 million in the third quarter. This includes $225 million of inventory headwinds associated with FIFO accounting.
Beginning in the fourth quarter, we will remove inventory impacts from adjusted results. This should help put us on an equal footing with peers from accounting perspective, and make our results easier to analyze for comparative purposes.
On slide four we provide cash flow waterfall strong cash flow allows us to increase our buybacks and reduce debt as I think I've mentioned the board approved 21 per share regular dividend that will be paid December <unk> to shareholders of record on November 18th.
Slide five highlights our capitalizations, we ended the third quarter was one $1 5 billion of cash and on a consolidated basis, we had $1 $5 8 billion of net debt excluding debt at Delek logistics of $143 billion. We had 146 million of net debt at Dk as of September 30.
In October we had two noteworthy credit transactions first detailed extended its credit facility to $1 2 billion, including senior secured revolving commitments of $900 million with a maturity date in October 27, and a new secured term loan of $300 million with a maturity date in October 24.
Separately Delek U S expanded the asset based credit facility to $1 1 billion with a maturity date of October 27.
Before handing it to Todd I would like to mention our key near term initiative, we have launched to evaluate our company's cost structure to ensure we remain competitive with peers. We have engaged advisors and are currently conducting this analysis, we plan to share additional information. Once we have concluded our work with that I will turn the call over to Todd.
Thanks, Reuben on slide six we provide fourth quarter guidance for modeling purposes operating costs are forecasted to be in the range of $190 million to $200 million.
This is a reduction from <unk> levels, which is a result of lower natural gas and electricity prices and slightly lower utilization rates.
G&A expenses in the fourth quarter are expected to be in the range of $82 million to $87 million.
This is elevated relative to <unk> as the company typically accrue for bonuses in the second and fourth quarters of each year.
Finally interest expense guidance of $55 million to $60 million for the quarter reflects the consolidated impact of detailed debt.
During the third quarter, our total refining system crude oil throughput achieved a new record of approximately 300000 barrels per day in the fourth quarter of 'twenty. Two we expect crude oil throughput to average between 280 and 290000 barrels per day or approximately 94% utilization at the mid point on <unk>.
<unk> seven capital expenditures during the third quarter were $81 million in full year 'twenty. Two capital program is expected to be approximately $300 million on a consolidated basis.
Later this month, we will issue our third annual sustainability report, we are focused on making continuous improvements in our ESG efforts and we encourage investors to monitor our journey.
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.
Our first question is from Roger read with Wells Fargo. Please go ahead.
Yes, Thank you and good morning.
Good morning, Rob I guess I'd like to come back to the capital allocation.
Number three.
And just understand.
Partly because the share repurchase guidance for Q4 is well above what I was putting in my model.
How youre thinking about the share repos are we going to be kind of.
Go on as we walk along here margin stay elevated and so our guidance will be more short term like this or are you thinking on a longer term basis of share repurchase magnitude.
I'll tie that Ed I guess to the strategic overview question are we essentially waiting for that before we get them more.
Long term guidance I guess.
Hey, guys. Good morning, how are you.
Good morning.
So.
We said in the previous call that we're going to put.
Shareholder plans the company in the top priority and we.
Walking the walk and not just talking the talk.
If you remember last quarter, we bought back the dividend.
We had the special dividend. We include the total buyback program to 400 million and we exceeded.
Our buyback guideline.
Two a $40 million this quarter versus the guidance, we gave of 25 to 35.
Yeah.
Obviously this quarter, we gave the guidance of $75 million to $100 million.
Planning to do so.
And we are also planning to reduce the debt. We obviously had a perception study with the vessel and Thats, what invest only protecting us.
Going forward while jail.
We look at very robust market.
And we see a very that the company is performing very well.
That said going forward.
We are looking to continue with the buyback aggressively win.
Into 2022.
Okay.
I appreciate that.
Other question just operationally as you look across your system.
Youre still in gasoline and diesel any thoughts any specific numbers you can share in terms of what the sales look like compared to say prior quarter compared to <unk>.
Pre COVID-19 period, just how you're comparing on a demand side here.
Yeah, Hey, Roger it's Tom Good morning.
I'll use our retail footprint, which I think is clearly pretty representative of what happens inside of our.
Total envelope of refinery operations.
And we're seeing same store fuel sales kind of 7% up year on year.
And obviously, we have certain footprint of retail locations that are difficult heavy we also have another subset that's gasoline having so I think we are.
Good representation across the Permian basin and on a year on year basis, again, where we're up and feeling good the demand is sticky here and certainly the lower prices recently have.
<unk>. So we feel good about where we are now and what the outlook looks like for 'twenty three on the demand side of the barrel.
Thank you turn it back.
Thank you Lord.
The next question is from Ryan Todd with Piper Sandler. Please go ahead.
Great. Thanks.
Maybe I could follow up I know I know, it's a hard question to answer but.
As we think about the.
The effort that you are I mean, I know you've engaged bankers the efforts, you're making to try to address the sum of the parts discount in the stock.
Can you maybe talk at a high level about.
If there is a view of what it is the.
It is helping to drive the discount is at the consolidated debt of detail on the balance sheet and the.
Perception of higher leverage than you really have.
And are there.
At a high level are there fundamental ways in which you think that that is yes.
If that's not the best addressed.
And in terms of any high level thoughts and maybe timing.
As we look forward is this something that we may hear in the next couple of months and six months in and any high level thoughts from that point of view.
Hey, Ryan It's Blake I'll take a stab as you know there is any kind of number of things that can drive market dislocations and so it's not always easy to pinpoint specifics I think you hit on one of them for sure the perception of over leverage on a consolidated basis, and we have talked quite extensively to investors about the historical gap between the consol.
David versus deconsolidation debt, which has trended anywhere from 8% to 10%.
Which is much more substantial now primarily due to the <unk> acquisition of three bear and so to a generalist portfolio manager, who goes and pulls our debt leverages on Bloomberg, we look very over levered, whereas if you're deconsolidation that we're not very levered at all so that's one of the drivers I think one of the other issues is that lack of liquidity and float at D.
And that's something we've been progressively trying to improve I think we benefited from being a kind of quote unquote last man standing in terms of the rest of the MLP group going away and we've increased our weightings within various.
<unk>.
Indexes like the hilarious.
That is improving our trading volumes.
And should be something we can work with going forward as we evaluate some of the parts opportunities and then the final thing I would highlight is during the downturn and Covid, we had to cut our dividend our refining system had negative EBITDA I think we're starting to demonstrate now that the refining assets are actually very profitable and delivering and so I think that's just going to be something over time that invest.
<unk> get more and more comfortable with that as we can demonstrate we have strong cash flow from these facilities I think thats going to help.
So at least from my perspective, those were three three data points that I think are probably contributing to some of the disconnect and as far as timing, we haven't really committed to anything specific.
We are trying to demonstrate we said we hired a corporate banker bar comps came onboard we have now formally engaged banks and so we're looking to demonstrate something thats probably over the coming months I think I think it's going to be fair to say, we have an announcement of a plan I don't think that necessarily means the planned effectuate. It obviously depends.
And on which route we go that could take some time, but we do want to keep the market abreast of the progress we're making.
Great. Thanks, that's very helpful.
<unk>.
Maybe just as we look forward to 2023.
You're spending $300 million in Capex this year in 2022.
Are there any large moving pieces that we should be thinking of in terms of next year's capital budget.
<unk>.
Ballpark direction, one way or the other.
Yes, Brian it's pod.
I think 300 million this year, obviously, a lot of that was dependent on growth that we've seen in.
And gathering and across the system.
We continue to see that as long term.
The strength so.
So we would anticipate that continuing through 2003 the one.
Outlier I would say that we didn't have in 2002 was a turnaround at any of our plants. We did some small surgical strikes, but we do have the Tyler turnaround scheduled at some point during the first half at least initially right now of 23 will come back and update the market more on that as we get a little bit closer to defining exactly what that timeline is.
But I think marginally higher than that $300 million and 23 is probably a good target set for yourself as we go into end of year next year planning.
Perfect. Thanks, Todd.
The next question is from Carly Davenport with Goldman Sachs. Please go ahead.
Hey, good morning, Thanks for taking the questions today.
Can you just talk a little bit about the efforts that you're making around the cost structure are there any numbers that you can put around the potential size of a program at this point or kind of any color you can provide about what kind of key areas you're targeting to drive efficiencies.
Hi, Ah correlates Rubin.
Well, we're looking at both.
The G&A and the Opex as part of the zero budget process that we have started.
We have some initial thoughts on findings I think we want to complete the work which will be done in the next few weeks and then we will have the whole structure around it.
I don't have.
An exact number to give but we will communicate our goal once we.
<unk> said on.
Mini programs that will be under the zero budget.
Got it great. Thank you and then the follow up on just kind of around the logistic side as you've had a couple of quarters here with with three bear under your belt kind of any key learnings that you would flag as you integrate those assets into the portfolio or any areas that have potential to surprise to the upside relative to initial expectations.
Thanks, again, Thats a great question and when we spoke we obviously discussed how a strategic acquisition for US. It's open up not just from a geographic standpoint, but also from a line of products that we believe.
<unk> and <unk>.
By and large as I mentioned on the call today, we are very pleased from the integration.
<unk> is coming in line with our expectation.
We are very pleased going forward, we have been and we have a business to minutes and we have a safe operation always to keep and we want to get the most out of those assets and those David amplification, we got.
Thank you.
Okay.
The next question is from John <unk> with Jpmorgan. Please go ahead.
Hey, guys. Good morning, Thanks for taking my question.
Just a follow up question on capital allocation looking.
Looking at your guidance for both the buyback and the debt Paydown in <unk>.
I'm, assuming unless we have a major improvement in the macro that youre expecting to drawdown some cash.
And if so I think youre sitting over $1 billion today in cash is there a thought to.
Working that cash balance down over time, and maybe doing more on the buyback then you would see from your from your post dividend free cash flow I know you talked about being aggressive on the buyback. So is that a safe assumption that you may continue to draw some cash.
Hi, This is ruben thank you for the question.
I think if you look at the buybacks and dividend these are done on.
Cash flow, we're generating free cash flow, we're generating when it comes to reduction of that I think the way to look at it as a combination of two of the two because on one hand.
Paying for deposits today, but it's around 33, 5% and on the other hand.
Since we have floating rate.
We are getting increased rates on our loans so.
We will use a combination of free cash flow and some of the cash that we have on the balance sheet to pay down the debt.
Okay. Great. That's helpful. Thank you and then just looking for your updated view on Midland differentials.
<unk> continues to trade above Cushing whats your view on production growth versus takeaway in the Permian.
In the Midland differential going into 2023.
So.
Question.
We are looking at Midland production that will be efficacy.
We are very close to the produce that we have over there.
We have seen the rigs in our area coming up very nicely on the <unk> area, but being more specific about the franchise.
Midland is going to get full between 12 to 18 months from today more or less we are today.
$5 7 million barrels a day, we've seen a nice increase.
More than 600000 barrels last year. So we are optimistic on that differential going forward and I think that we'll see more news around the frontline.
The next 12 to 18 months.
Okay.
The next question is from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning.
Yes, the target for your minimum cash balance and is it reasonable to think that buyback.
We'd be more than your free cash flow after dividend in 2023.
Matthew I don't think I don't think we want to give a specific cash target per se I think we've said historically that we need to maintain a probably $5 million to $600 million or so to run the business. Obviously, we're comfortably above that it is nice to have additional dry powder and potential recession.
<unk> potential M&A, so I think where we're trending right now seems to be pretty comfortable as Ruben said, we may use a little of the cash to pay down some debt, which probably makes sense given the arbitrage between interest expense and cash.
Benefit in terms of 'twenty three I think you were asking are we going to are we going to basically use cash to do buybacks I think alba goal is of the opinion that we're looking to use free cash flow I don't think we want to pinpoint anything specific I think the robust buybacks that we're looking at right now are for.
Before the sum of the parts scenario, where we feel like the stock is really discounted once we finalize the sum of the parts scenario, we understand what the various entities look like I think at that point, we're going to get more specific in terms of a formulaic approach.
Sounds good. Thanks, and then is there any update on your R&D investment in terms of when it is expected to start up and when the contribution might flow into.
To delek.
Yes, Matthew I think the best thing to do is look at the global clean energy.
Filings the last I believe we have seen is that they had deferred to start up to March with I believe a 90 day option to extend so.
Just to be conservative maybe youre looking at a midyear next year kind of start up and of course, we have a 90 day option. After that so it's probably feeling like a late second half of the year type of.
Scenario should we enter the project.
Got it 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.
And as a follow up on the oil basis. So W. Ti Brent has widened modestly just hoping that you can give us an updated view on how you see EBIT trending post the SPR releases and noting that the.
The compression in and use the EU gas spreads also helps the economics on sour crudes.
Yes, it's Todd Thanks for the question. So I think you watch the markets as closely as anybody out there we've kind of seen the Brent Ti.
And the dead prompt settle around that seven ish dollar range.
The curve, we are kind of mid to high fives, maybe low sixes on any given day.
We firmly believe that due to what avid all was commenting on earlier in terms of the dynamic between growth that we see in the Permian as well as no incremental takeaway capacity being built that Brent Ti spread is going to continue to remain wide and roll up to that kind of seven ish level on a go forward basis.
And as we truly breach that kind of like 80% to 85% utilization rate of existing takeaway capacity. That's only think we will start to see the Midland do the work and Brent Ti probably hold in at those at those wider level. So.
I think that's what we're looking at this 10 seconds.
I appreciate that.
Second question is al Wahhab basis on <unk>.
Gas prices.
Prices recently dropped to zero because takeaway there, it's a very tight and it wont get takes for another several quarters. So wondering if you can talk about how this benefits the opex in hydro treating costs at big spring.
Yes, so we don't obviously break it down into individual plant level from that perspective.
I think what we can say is that we are obviously keenly attuned to what's happening in the la area, We think thats going to continue to your point.
And every day, we are working on the commercial side of the ledger to increase our exposure to <unk> gas I think its safe to say that big spring is 100% exposed to that market.
We are again actively looking at different projects some of which have have kind of come to fruition through the acquisition of three there and the inclusion now of natural gas in our gathering and processing portfolio and using that to leverage into potentially capitalizing on accessing law for summer.
Other facilities, so I think theres more to come on that and we'll continue to update the market as and when necessary.
I appreciate it thank you.
Thanks Glenn.
The next question is from Paul Cheng with Scotiabank. Please go ahead.
Hey, guys good morning.
Thanks, Bob.
Two question piece.
The first one wanted to talk about the hedging and can you say that.
The nature of the hedging then now you guys are doing and what is the.
In the future you go into reducing the activity or that youre going to increase or stay the same.
And secondly that on the.
On the Iot again, Bakersfield once you Carolyn.
Thinking you're seeing that.
To get in the second half next year.
What is the maintenance and pension Youll Kevin.
And also just curious.
You have full biodiesel plan all of that.
The branding.
Those making money again in the third quarter. Thank you.
Hey, Paul It's Blake, let me handle the first two and defer to Todd on number three so on the hedging piece as you know, we don't disclose specifics, but I will say this I think as we said in the script that.
That we're planning going forward to begin adjusting out the other inventory impacts.
With that being said I think that allows us the opportunity to then minimize the hedging because historically those two should be offsetting each other but if we're able to adjust out the inventory then it really makes sense to reduce our hedging exposure. So our plan going forward is to probably minimize or reduce.
The amount of hedging that we've done historically, so I hope that answers that that's really all we can say from that level of disclosure on GCE.
It's $13 million for us to participate in a 30% interest so I don't want to Overcommit to anything that we're going to do in the future, but I think most would view that as a fairly small amount of capital to participate in renewable diesel to.
To get our foot in the door and dabble, So I think.
It's likely that we would participate it tells a nice ESG story allows us to kind of understand the market and so I think I'll, probably just have to leave it there and then I'll give it to Todd for the biodiesel plant, yes. Thanks, Blake Paul just to clarify we actually have three.
Biodiesel facilities that.
That exist inside of our footprint.
Three facilities R&D profitable.
And our I will remind you to certain extent exposed on the upside to <unk>.
Obviously as well as what the <unk> for Windows and a mix of various different feedstock. So those are profitable and we continue to believe that they will be profitable on a go forward basis, but not in a material way that would impact results for the total corporation.
Great can I just.
In a very simple accounting question.
Under the FIFO accounting.
Why that we still have the LCM.
Paul let us come back to you offline on that I think it's a small amount compared to the LIFO peers, but I think it's a more detailed accounting question. It would be better just to take offline if thats alright, Okay will do.
Okay.
The next question is from Dan Kutz with Morgan Stanley . Please go ahead.
Hey, Thanks, good morning, everyone.
Hey, Dan.
I just wanted to ask I guess kind of a <unk>.
Broad high level question on in terms of what you guys are seeing from a demand perspective across your system and what your outlook is moving forward, maybe parsing it out by the different product market.
Yes.
Yeah sure Dan This is Todd as I mentioned, a little bit earlier on the call. We're seeing sequential growth in our retail footprint year over year kind of running lets call about 7%.
Think thats pretty representative of what is happening inside the Permian basin, both on gasoline and diesel demand.
Obviously in the last quarter seeing pretty robust product markets in New York Harbor area and in the Chicago land market.
New York based on limited imports.
And some maintenance Chicago based on the unfortunate incident occurred one of the refineries there in Toledo. Obviously those are those are shorter term, but by and large we see demand continuing to be robust and our footprint as well as elsewhere in the United States.
Certainly lower flat price has continued to help.
Make the consumer resilient and I would say the last kind of shoe to drop that we've seen.
As on the jet fuel side of things, where we are effectively now back to kind of pre COVID-19 levels and.
And obviously can take advantage of that inside of our system. So I'll leave it there.
Also just to build on their toes comment also the obviously the supply side of the play.
The usual.
Pretty much the first time in the history of refinery that we see such a big reduction in the production.
And that also play the supply side is as important as the demand side that system. So we are remain as we said.
Very optimistic about the business and above.
Thank you.
Great. Thanks, a lot that's really helpful color and then.
I guess I just was hoping that you could refresh my memory or let me know if theres any updates on kind of what your.
Mid cycle EBITDA outlook.
I appreciate it.
The backdrop kind of supports above mid cycle earnings.
For the foreseeable future here, but just wondering with the <unk> acquisition and a lot of kind of strategic projects underway. If you could.
Sure the latest on your mid cycle outlook. Thank you.
Thanks, Greg.
Great question, then they can put up on that later on if you guys wanted but we didn't give specific guidance.
And the mid cycle, what I can tell you that when we look today.
Everyone is basically in the budget season, as we speak with Cmos.
Market and we think that the.
Mid cycle is higher than we thought before.
On the top of that we see a storm.
<unk> coming from our customers so going for going forward would we are optimistic very optimistic about what we see a $4 million.
Blue med demand and supply.
Great. Thank you I'll turn it back.
The next question is from Jason <unk> with Cowen. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Hey, I wanted to first ask about.
Debt reductions that you discussed and historically I think you've carried both high cash balance and high debt levels as well, but overall low.
Net debt levels.
Can you talk about why now is the right time to reduce that debt and what may be a gross debt target is for the business. Excluding the MLP. If you have one.
And my second question is on the strategic initiatives.
That you're exploring.
Thanks for talking us through some of the considerations on that front.
One thing you didn't mention was the size of the parent business and I Wonder as you explore options to enhance value.
If you think.
Dk parent is that the appropriate size or if if theres any consideration in and growing the business. Thanks.
Yes, so I would like to.
Two questions I would like to be as specific.
So.
Debt reduction obviously, there is incentive on the market because of the dislocation between interest on the Boeing side and what you can get them on the deposit side, our strategy of having meaningful cash on the balance sheet did not change we still want to maintain a meaningful cash on the balance sheet to allow us one to be read.
The full 90 day, if it presents itself and second to be able to we can nimble about opportunities, but we are doing some adjustments some of them will be.
Diluted from a free cash flow and some of them.
<unk>.
The cash that we have for now.
On our balance sheet going.
Going to the second question.
Obviously, we just finished an acquisition with <unk>.
June five.
Just five months now and we are very pleased about that we haven't they adjusting that and our commitment is.
To do.
The organic growth only if it's accretive to shareholders. So it's not that we are not going to do an M&A just for the sake of M&A and we are not going to go with just for the sake of growing we are going to grow.
Ian.
In order to allow investors to have a good investment in our shares and we have accretive.
<unk> in there so I hope that does give you some guidance.
What we're going to do it.
Great. Thanks.
This concludes our question and answer session I would like to turn the conference back over to <unk> for any closing remarks.
Yes, so I want to take first and foremost to our employees.
We're able to have a record quarter for utilization standpoint, and operation very proud of the team's performance.
They want to take to think the invesco in vessels of things option, believing in Asia Delek reviewed as we ship and we want to take to thank the management team here in the room.
They are running.
This company in guidance there too.
And we're putting the potential we can well thank you Paul.
We meet again in the next quarter. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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