Delek US Holdings Inc (DK) 2020 Q4 法說會逐字稿

Good morning, and welcome to the Delek Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Blake Fernandez. Please go ahead.

Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' Fourth Quarter 2020 Financial Results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; Reuven Spiegel, EVP and CFO; and Louis Labella, EVP and President of Refining; 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 US website.

As a reminder, this conference call may contain forward-looking statements as that term is defined under the federal securities laws. Please see Slide 2 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. Investors 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, which is posted on the Investor Relations section of our website.

Our prepared remarks are being made assuming that the earnings press release has been reviewed, and we are covering less segment and market information than is incorporated into the 4Q press release.

On today's call, Reuven will review financial performance. I will cover capitalization and guidance. Louis will cover operations and CapEx, and then Uzi will offer a few closing comments.

With that, I'll turn the call over to Reuven.

Thank you, Blake. On an adjusted basis for the fourth quarter of 2020, Delek US reported a net loss of $204 million or a negative $2.77 per share compared to net income of $9 million or $0.11 per diluted share in the prior year period.

Our adjusted EBITDA was negative $138 million in the fourth quarter of 2020 compared to $65 million in the prior year period. The second paragraph of the press release highlights $38 million of after-tax headwinds or $0.52 per share of items included in adjusted results.

I would like to highlight the tables on Page 10 of the release providing inventory hedging impacts and Page 14, providing other inventory impacts in the quarter.

On Slide 4, we provide a cash flow waterfall. In the fourth quarter of 2020, we had a positive cash flow of approximately $117 million from continuing operations, which includes a working capital benefit of $243 million. Cash capital expenditure in the quarter were approximately $32 million.

With that, I will turn it over to Blake.

Thanks, Reuven. Slide 5 highlights our capitalization. We ended the fourth quarter with $788 million of cash on a consolidated basis and $1.56 billion of net long-term debt. Excluding net debt at Delek Logistics of $988 million, we had net long-term debt of approximately $573 million at December 31, 2020.

I would remind you that we expect a federal tax refund of approximately $156 million, of which $136 million is expected to be collected in the first half of 2021.

Moving to Slide 6, we provide our first quarter guidance for modeling. Our controllable cost reduction initiatives remain on track on an underlying basis. That said, inclement weather in our regional footprint in February is putting upward pressure on energy-related expenses on a short-term basis. We would expect weather-related expenses to normalize in due course. Lastly, the Wink to Webster JV announced in January that the Midland to Webster segment of the pipeline is now operating.

With that, I will turn the call over to Louis to discuss operations and CapEx.

Thanks, Blake. During the fourth quarter, our total refining system crude oil throughput was approximately 229,000 barrels per day. In the first quarter of 2021, we expect crude oil throughput to average between 165,000 to 175,000 barrels per day or approximately 56% utilization at the midpoint. This reflects an accelerated timing of the El Dorado turnaround originally planned for 2Q, weather-related downturns at Big Spring and Tyler. And in February -- and in Krotz Springs continue to run at its current operating mode. Big Spring and Tyler are expected to be back to normal operations in March, and we have no further turnaround work planned for the rest of the year.

On Slide 7, capital expenditures during the fourth quarter were $32 million, bringing full year 2020 spending to $240 million. This was $10 million below our revised capital budget and $85 million below our original 2020 budget.

As a reminder, our 2021 capital program is expected to be $150 million to $160 million, including turnarounds, representing a reduction of approximately $85 million from the 2020 levels.

Next, I turn the call to Uzi.

Thank you, Louis. Good morning, everybody. Delek remains on track and well positioned entering 2021, supported by cost and capital reduction initiatives.

Recent industry downtime resulting from cold weather along the Gulf Coast should create improving product inventories and margins for the Gulf Coast region. Our 80% ownership in DKL continues to perform well, with the company outlining another 5% distribution increase in 2021.

In renewable diesel, we have retained a low-cost option of $13 million to acquire a 1/3 economic interest in GCE Holdings Acquisitions, which indirectly owns and operates the Bakersfield, California refinery. In our view, this approach to renewable diesel helps mitigate execution risk and is far less capital-intensive.

The retail business has served as a layer of stability and diversification throughout the year. We see strong growth opportunities in this segment and with returns well above other areas within energy.

With that, I'll turn the call over to Blake.

Thanks. Before we conclude, we would like to address CVR's Energy's nomination of 3 director candidates for election to the Board at our 2021 Annual Meeting. Delek is committed to maintaining a strong, independent and diverse Board that serves the best interest of its shareholders, employees, customers and partners and regularly reviews opportunities to create and deliver value. Our Nomination and Corporate Governance Committee will evaluate CVR's nominees and make a recommendation in due course. We will not be making further comments on the nominations of our shareholder conversations at this time. The purpose of today's call is to discuss fourth quarter and full year 2020 earnings results, and we ask that you keep your questions focused on these topics.

With that, operator, can we please open the call for questions.

(Operator Instructions) Our first question comes from Roger Read with Wells Fargo.

I guess, if we could, really, the renewable diesel, we've all been kind of waiting to hear what the investment side for you would be. Any more you can offer us in terms of timing of the facility coming online? Any thoughts on -- given that it's going to use a different kind of feedstock than a lot of the other facilities, how that's going out in Bakersfield and maybe thoughts on margin potential?

So Roger, there's not a lot of updates besides what's in the slides. It's supposed to come online January '22. We have a 90-day option once it's up and running. So there's really no benefit to us to execute that prior to this facility being up and running and basically mitigating the execution risk.

You rightly point out, they are potentially growing some Camelina seed, and that could mitigate some of the feedstock risk. As we understand it, that could have a very low CI score. And that could be very interesting, but we're going to really defer to GCE in their disclosure. So at this point, we're basically just awaiting the execution and let them build the facility and 90-day free look. And as you see there, $13 million to participate. So not a lot of additional information aside from what's in the slide.

Okay. And as a follow-up, I don't want to get into the issue with the activist side of things. But some of what they've talked about is some of what -- those of us on the sell side, and I think the buy side of thought before, which is what is the value of some of the units, Krotz Springs at the time you acquired Alon. Uzi, we were all wondering if the unit would stay up and running. Right now, it's obviously idle. Putting all the other stuff aside, what kind of environment do you think we would need to see for Krotz Springs to come back into operation? Or should we consider it as one of these candidates more for a terminal or a future expansion of renewable fuels?

Roger, that's a great one. Let me take it in pieces.

First of all, Krotz wasn't idle. We took the time and did a 3 time turnaround. It is finishing as we speak. In today's environment, including RINs, Krotz Springs is actually in the positive territory. It's not making -- on paper, it's not making a lot of money, but in today's margin, it's a $3 million, $4 million, $5 million a month margin. So let's just call it $3 million to $4 million. That's including the RINs.

We did take the time and enhanced another project that we will be able to disclose over the next month or 2 that will add profitability to Krotz Springs. So we are in a waiting mode. But if margins continue to be where they are, $15, $16, with RINs $1, then we may restart the refinery over the next 2 to 3 weeks.

The next question is from Manav Gupta with Crédit Suisse.

Uzi, this is a little bit of follow-up on Roger. And I think I won't ask about a specific asset, but those who know you know you well enough that you operate assets for free cash. You don't operate assets for nameplate capacity or any other reason. So I'm just trying to understand, let's say, 3 to 6 months down the line, and let's not get into specific refinery, but let's say there is a refinery where you think it will struggle to make free cash, would there be any hesitation on your part to close the asset and move ahead with it?

Well, we are to the -- Manav, we are to the leisure of the shareholders. Shareholders want us to make money, not to be big. And we are -- our commitment -- and we are committed to our free cash flow, and we are committed to operating profitable assets. You make decisions on asset not in 1 month or 2 months or 3 months. You take long-term vision. But absolutely, to answer your question, it's clear that if we can't make money in an asset that is for a period of time, then we shouldn't operate it. We look all the time on optionalities and changing different things. By the end of the day, our commitment is to make money, not to have more assets.

That is perfect. And Uzi, just on Big Springs, very quickly, it's a very good refinery. It's done very well for you in the past. In the quarter, it looked a little lighter side. I'm just trying to understand were there any onetimes because it's a very good asset. So for that asset to generate that kind of gross margin, something must have gone wrong. So if you could elaborate a little?

Yes, absolutely. 2 or 3 reasons, if you will. First of all, asphalt. In a rising market, asphalt is lagging, and that's one thing. The second thing, we had a couple of hiccups in Big Spring. We still consider Big Spring one of the best refineries in the country. So I -- it's light this quarter, it is, but I wouldn't read much into it. Actually, when we hear about different people, we get phone calls about that asset all the time if we have any intent to do something with it. Certainly not, especially in light of Permian coming back. So 1 or 2 quarters don't mean much. We had the freeze this quarter as well, but we would be back, what, March 1, I think, Louis, with full slate. Big Spring is one of our best assets.

The next question is from Prashant Rao with Citigroup.

I just had one, I wanted to sort of ask about the balance sheet. The debt level is high, it is for a lot of refiners right now given where we are in the cycle. But just wanted to get your thoughts on how you see deleveraging occurring, and if there's a target for year-end? And do you think that it can be achieved through free cash flow in some of these revenue initiatives? Or are other methods or strategies needed?

Thanks for taking the time, Prashant. So let's go one by one.

As you know, we have $156 million, as we said, coming our way, hopefully, over the next month, if not over the next 3 months. We're hoping to get this quarter, if not -- this quarter -- I mean, first quarter. If not, it will be in the second quarter. We didn't commit to first quarter. So $156 million coming our way. That's on that side.

Second, free cash flow, we said that all we need is another year of $270 million, $280 million to be free cash flow. That's the second thing.

The third thing, we have DKL doing very well. And I don't know what -- we just announced that we have another 5% increase in dividend with DKL so that's an asset that is doing very, very well. We're not in the business of holding 80% in DKL, so that's another avenue of getting cash.

So I wouldn't rule out one of these options. Where we feel very comfortable with our cash position, you saw in the quarter, we didn't burn any cash. We actually built cash. We feel that the second quarter -- or the first quarter and the second quarter will be similar to that. So just something -- the balance sheet is not something that we're concerned much about it.

Okay. And just a quick follow-up for us so that we know what you're -- we're on the same page as you. When you're thinking about the debt level on the balance sheet, are you targeting -- sort of internally as your target more debt to total cap metric? Or are you looking at it more on a net debt-to-EBITDA metric? What do you guys think is the right metric or primary metric that we should be watching that you're targeting in terms of balance sheet?

That's a great question, and I'm going to be -- if we can get to -- DKL is right now 3.8x debt to EBITDA. There's no net debt in DKL. If we continue to do what we're doing, that number will go down toward -- if you remember, we said all along, 3.5 is something that we are comfortable for DKL. If you eliminate DKL, we are at $600 million and $650 million right of net debt. If we can get less than 2x at the DKL level outside DKL, that's an area that we are comfortable with.

The next question is from Ryan Todd with Simmons Energy.

Maybe a quick follow-up on the refining side. I mean can you talk a little bit about any comments on RIN costs, either what was the RIN expense in the fourth quarter? Are you thinking about RIN expense in the first quarter?

And maybe refresh our view around the likelihood of potential reintroduction of small refinery exemptions under the new administration?

Well, I'll take the second one. Blake, I'm sure want to take the first one that will allow me to drink my tea here.

So the second one, we are not counting on the Biden administration to handsomely give SREs. However, there is that Supreme Court ruling that is coming in, I think, a couple of months. And that may change things. I'm going to remind everybody that even under the Obama administration, Krotz Springs and El Dorado refinery got their exemptions.

So we'll see what the court ruling is. And then if it's positive to refiners, I don't see any reason why these 2 refineries won't be eligible to that. However, if the court -- and our assumption is that the court won't rule for that. Now we don't really know, but we can't build our cash flow based on something that is not tangible.

And Ryan, on the first question, so we have historically not disclosed what our RIN exposure or expense is. I will tell you, obviously, Krotz with the FCC unit not running, that's a good chunk of our exposure right there. So that mitigates some of it. But historically, we have not disclosed it.

I mean, at the end of the day, we do have some blending capability. But I want to be clear, we prefer not to have elevated RIN expenses. So we'll just kind of leave it there.

Maybe on a separate note, I mean, I guess I appreciate that you can't say much about the Bakersfield plant. But outside of the Bakersfield investment, I mean have you explored the potential to participate further in the RD business? Are there any of your facilities that you view as potentially conducive to conversion like Krotz Springs? Or at this point, is kind of a near-term focus just the capital-light plan there?

Ryan, you're asking a great question. We want to do it step at a time. Are we looking at it? Absolutely. We are concerned about the feedstock cost. And we want to do it. We play to GCE. In 1/3 of that, we feel comfortable with that position. We do look at other opportunities maybe to convert the entire refinery, maybe to convert some of the refinery. Just remember that we have 4 small refineries, relatively small. So they're all attractive to some degree with that area. But we are not in the business of investing right now $400 million, $500 million in something that may not happen profitability-wise.

The next question is from Phil Gresh with JPMorgan.

First one, just on the working capital trends, which looked positive in the fourth quarter, how much of that was just rising crude price effects and benefits that come from that versus maybe, I don't know, any inventory effects for Krotz Springs from running at a lower level? And just how would you expect working capital to progress from a cash perspective in 2021?

Phil, first, shutting down the refinery hurt your working capital. It doesn't help. So shutting down Krotz didn't help us. It actually hurt.

Because if you remember, you pay for crude, and I'm sure you do, 20 days after the end of the month, you collect the receivable 5 days. So shutting out a refinery or not running full slate hurts your working capital and doesn't help. Rising crude prices certainly help. $60 now will help tremendously in the first quarter as well.

And I don't have the breakdown between -- we don't have the breakdown between inventory and rising prices on the receivable side or the -- I'm sorry, the payable side. I want to make sure that you understand though, we manage our cash on a daily basis and pay attention to our cash. So by the end of the day, that's the most important thing, and we run our business like that.

Okay. Great. One other thing, as you talked about in the last call, you had thrown buybacks out there as a discussion point if cracks got to a certain level. Though it does sound like, obviously, that the balance sheet is a key priority as well. So just your latest thoughts on buybacks versus balance sheet?

It's a combination, obviously, Phil. We feel comfortable with the balance sheet. As I said, $156 million coming our way pretty soon. And that puts us in a great position with the balance sheet, again, especially in light of DKL performing so well. And we'll see what we do with that.

I think it's still -- so the balance sheet is -- it feels good. We don't want to buy back out of leveraging. So we would like to see, like I said, 2, 3, 4 months of free cash flow. Now in the past, we said that $9, $10 cracks are good, with RINs prices being $1. At that time, RINs were $0.20, so there is $1. Obviously, that number is much higher. So I don't want to commit today to a number of crack because I really don't know what the other things will do, Midland differential or RINs. Once we see free cash flow. There's no reason to believe that we won't go and find a combination between buyback and deleveraging.

Okay. Last question, just on retail. You talked in your release about line of sight to strong growth potential. So I thought I'd see if there's anything worth elaborating on there.

So Phil, retail, we see very strong organic growth opportunity. Within the energy complex, that's probably one of the strongest rate of return opportunities that we see. And so basically, that's what we wanted to highlight. Obviously, it served as an avenue of stability this past year. And once we do get back to a growth mode, we do see the opportunity to redeploy capital into that business. And we're basically above 20% rate of return on some of the investments that we're seeing. So retail is attractive. And whether that sits with us or someone else, that remains to be seen.

The next question is from Matthew Blair with Tudor, Pickering, Holt.

I'd like to start on the refining side. It looks like Tyler's gross margins improved fairly substantially quarter-over-quarter, which is in contrast to most Mid-Con segments that saw falling margins. Is there anything you'd like to call out here?

Well, we did very well in Tyler vis-à-vis moving crude and capturing -- or capitalizing on opportunities in that market.

We -- the Delek trading and supply performed very well in Tyler. So you probably saw the $7 in jump. I would say that this is maybe 1 or 2 times event. I wouldn't go and just say this is a going-forward because at the same time, as you know, we didn't perform as well at El Dorado, and these 2 offset each other from time to time. So I -- Tyler did great, but let's -- yes, let's take that some time before we celebrate victory here.

Makes sense. And then on the renewable diesel side, it doesn't look like there's any existing LCFS fuel pathways for Camelina. So I guess, one, is getting that pathway -- is there any risk to getting that pathway? Or do you view that as pretty standard?

And then two, Blake, I think you mentioned you're expecting a pretty low CI. Are we talking something in kind of like the 20 to 30 range? Or could it possibly be even lower than that?

So Matthew, we really want to kind of defer to our friends over at GCE since we're not even technically in the partnership at this point. I have read and I'm sure you've seen industry commentary out there talking about 25, 30 CI scores. But I mean, again, we're not even in that. So I don't want to comment for our friends. And at this point, we just view it as a very attractive option.

And again, to the extent that they can grow their own feedstock, I think that mitigates a lot of the risk in the industry, which we are very concerned about in terms of feedstock risk. So at this point, we really kind of just need to leave it there.

The next question is from Neil Mehta with Goldman Sachs.

First question is on Delek Logistics. As you said, the stock's done really well here, and we've seen some multiple expansions. So how do you think about the potential for monetization there given your large ownership, which accretes to your sum of the parts?

And then in general, as you think about potentially rightsizing the size of your refining business, if you elect to do that, how do you think about the fact that DKL is very much tied into the refining system, recognizing there's a lot of third party in there, too?

First, these are, Neil, as usual, very good questions. I think there are 3 or 4 of them, I'll try to address each one of them here. First of all, DKL performed very well and rightfully so.

We improved the leverage ratio. We improved the coverage ratio. The Big Spring gathering system, the trucking is performing very well for DKL. So -- and we do have other organic projects at DKL. And today, we announced another 5% increase for next year.

So we feel good about DKL. Still, the yield is hovering between 8% and 9%. And we were very consistent with that thing.

We are not in the business of owning 80%. We said it all along. It depends how we go about it, if we want to buy it in or start monetizing some of it. That's something that we are looking at very carefully. We couldn't do much during the blackout period. So that's something that we should continue to look at. We obviously look at the difference between DK and DKL and say to ourselves, okay, does it make sense to look at DKL and then buy DK in lieu of DKL shares. I mean buyback.

More and more, DKL is a third-party provider and not just tied to refineries. I think (inaudible) and team are doing a great job in going away from being dependent on the refineries. And it shows itself in the multiple that more and more, it's becoming a real MLP.

So do I think that DKL is something that we look at, that we need to look at? Absolutely.

One last thing around the DKL and the refining asset. We just need to remember that as we get more and more third party, the percentage of refining assets in DKL goes down, and its dependency on refining goes down. I hope I answered all your questions, Neil.

Yes, that's really good, Uzi. And the follow-up is just on -- you have a large gathering system in the Permian. Are you seeing, as Brent has now moved through $65 here, the return of production, particularly from privates? And just what is your view on activity levels as you talk to customers for Permian production?

And then is that -- how do you think about that flowing into Midland differentials, which are trading at a premium to TI? And part of that, I think, is the production level. But part of that is also the quality of that neat barrel, which is a better quality than even a Brent barrel?

All these are great questions, Neil. I think that it will take time for production to catch up with the overbuild of the capacity. I think, as great as it sounds, the Biden administration may help the differentials because they won't allow building infrastructure while the Trump administration allowed a wide-open building assets.

Do I think that the differentials will go back to minus $5 over the next year or 2? We don't think so. And we don't build our budget on that -- based on that.

The level of activity is increasing. By the day, you see it. And people -- more and more people will get comfortable. Remember, I don't think that the Permian producers have seen $60 for a long, long, long time. Because when it was $60 WTI last time, the differentials were like $5 or $7 or $8.

So everybody -- I think a lot of people are rushing to do it. I think the demand if a vaccine will materialize, as we see in Israel, for example, where there's a 95% reduction in the severe cases, then demand will come back second part of '21 and '22. And if this is the case, then the outlook will be nice. I saw the government put a note together thinking that our branch should grow even higher from here, I think, $75. And if this is the case, then production or level of activity will go up. I don't count -- we do not count on the $5 discount at this point.

The next question is from Doug Leggate with Bank of America.

This is Kalei on for Doug. Just a couple of questions for me. So I know you guys have pulled forward the El Dorado turnaround. I want to know what the scope of that turnaround is, whether the scope of that work is final or whether it could be augmented by perhaps the recommendation of the Board?

So this is Louis. Yes, the scope of the turnaround for El Dorado is maintenance, general maintenance, open, clean and inspect. The scope is pretty much fixed. And due to the weather we had, the team was ready and -- to execute, and we pulled it forward so we can try to get it in -- get ready for the rise in demand.

And Kalei, I think just so -- the timing of that is expected to be back online basically beginning of April. So we should have a full 2Q effect.

My second question is also on renewable diesel. Would the execution of the renewable diesel option obligate you to the liabilities of the operators such as any [debtor] that are recurring?

Kalei, that's something we probably ought to take off-line. So maybe we can huddle up on that off-line, if that's all right.

The next question is from Jason Gabelman with Cowen.

Yes. Maybe I'll try a couple on this Global Clean Energy project, understanding that you can only talk so much about it. I was wondering if Global Clean Energy has actually broken ground yet on the project and if the facility is going to include a pretreatment unit?

And then my follow-up is on refining. I was just wondering El Dorado looks like it ran at least in 4Q at a decently high rate in the whole system, is running at a decently high rate, but margins remain pretty weak. So it just -- I don't know, it looks like maybe the optimal operating paradigm is to run at lower rates. Can you just discuss the decision, particularly at El Dorado to run at relatively high levels despite negative margins?

So Jason, on the renewable piece, we're really going to have to defer to our folks over there at GCE. And so at this point, it's not 100% clear what the pretreatment situation is. So again, I'm sorry to not give you an awful lot of information, but we're basically on the sidelines on that. So sorry.

And in regard to El Dorado, as I said, if you look at Tyler, Tyler is very, very strong. You probably want to think about offsetting factors here between Tyler and El Dorado. We do believe that in today's market, today's environment, El Dorado is certainly in the green in all areas.

When I say green, I mean green EBITDA and green net income. So we'll see once we come up, how it plays. But I'm -- I wouldn't read much into one quarter. If you look at the Tyler, Tyler is $7 and El Dorado is minus $4. So they offset each other.

This concludes our question-and-answer session. I would like to turn the conference back over to Uzi Yemin for any closing remarks.

Well, I'd like to thank everybody for their interest in our company. 2020 was a tough, tough, tough year and '21 -- at least the second part of '21 looks a little better.

I'd like to thank my colleagues around the table here. I'd like to thank investors for their confidence in us. We don't take it lightly. I'd like to thank the Board of Directors for their vote of confidence. But mainly, I'd like to thank our employees for making this company what it is. Have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.