Delek Logistics Partners LP (DKL) 2014 Q3 法說會逐字稿

Good morning. My name is Tasia and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter earnings conference call. (Operator Instructions)

I would now like to turn the call over to Mr. Keith Johnson. Sir, you may begin your conference.

Thank you, Tasia. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics' third quarter 2014 financial results. Joining me on today's call will be Uzi Yemin, our general partner's Chairman and CEO; Assi Ginzburg, CFO; Danny Norris, CAO; and other members of our management team.

As a reminder, this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.

You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Today's call is being recorded and will be available for replay beginning today and ending February 6, 2015 by dialing 855-859-2056 with a confirmation ID number 17066617. An online replay may also be accessed for the next 90 days at the partnership's website at DelekLogistics.com.

Last night we distributed a press release that provides a summary of our third quarter 2014 results. This press release is available on our corporate website and through various news outlets.

On today's call, Assi will begin with a few financial comments and Danny will review our financial performance. Then Uzi will offer a few closing strategic remarks. With that, I will turn the call over to Assi.

Thank you Keith. Delek Logistics reported yesterday another strong quarter. Our DCF was $17.7 million and EBITDA was $21.2 million for the third quarter 2014. This is an increase from a DCF of $13.4 million and EBITDA of $16.6 million in the third quarter 2013. We ended the quarter with a DCF coverage ratio of approximately 1.4 times.

Based on our performance, we are pleased to announce an increase in our quarterly distribution to $0.49 per unit for the quarter ended September 30, 2014, which is a 3.2% increase from our second quarter of 2014. This will be our seventh consecutive increase and is 21% higher than our third quarter 2013 distribution of $0.405 per unit.

Now I will turn the call over to Danny to discuss the financial results.

Thank you Assi. For the third quarter 2014, Delek Logistics reported net income attributable to all partners of $15.1 million, or $0.59 per diluted limited partner unit, compared to net income attributable to all partners of $12.5 million, or $0.51 per diluted limited partner unit in the prior-year period.

Improved performance compared to the third quarter of 2013, was driven by higher volumes on the Lion Pipeline System, several acquisitions completed during the past year and a higher margin in the west Texas wholesale business on a year-over-year basis. As a result, contribution margin increased to $23.7 million in the third quarter of 2014 from $18.4 million in the prior-year period.

On a sequential basis, gross margin declined in our west Texas business compared to a record level in the second quarter of 2014, which was the primary reason for lower performance on a consolidated basis in the third quarter of this year.

Now I will spend a few minutes discussing our two reporting segments. Third quarter 2014 contribution margin in our pipeline and transportation segment improved to $15.1 million compared to $10.8 million in the third quarter of 2013. The improvement was primarily attributable to storage fees from the Tyler tank farm purchased in late July of 2013 and the El Dorado tank farm acquired in February of 2014.

Also during the quarter, volumes on the Lion Pipeline System increased year-over-year as shipped higher volumes of crude and finished product for Delek US's El Dorado refinery, following the turnaround completed at that refinery in the first quarter of 2014.

Contribution margin in our wholesale, marketing, and terminalling segment was $8.6 million in the third quarter of this year compared to $7.7 million in the third quarter of last year. This increase was due to a higher margin in our west Texas wholesale business and higher terminal volumes due to acquisitions completed over the past year.

Acquisitions included the Tyler, Texas terminal in late July of 2013, the addition of the north Little Rock, Arkansas terminal in October of 2013 and the El Dorado, Arkansas terminal in February of 2014.

In our West Texas wholesale business, volume was 17,920 barrels per day in the third quarter this year compared to 18,970 barrels per day in the prior-year period. The gross margin was $2.20 per barrel in the third quarter of 2014 compared to $1.63 per barrel in the prior year period.

The margin per barrel in the third quarter included approximately $1.2 million or $0.74 per barrel from RINs generated in our ongoing ethanol blending activities. This compares to a gross margin that included $2 million, or $1.13 per barrel, from RINs in the third quarter of last year.

Terminalling throughput volume of approximately 95,000 barrels per day during the quarter increased on a year-over-year basis from approximately 74,000 barrels per day in the third quarter of 2013, due to acquisitions completed in the past year. During the third quarter, volume per day under our east Texas marketing agreement was approximately 59,660 barrels per day compared to approximately 61,700 barrels per day in the third quarter of 2013.

As of June 30, 2014, Delek Logistics had a cash balance of approximately $700,000 and total debt was $230 million. We ended the quarter with approximately $157 million of unused availability under our $400 million credit facility.

Capital expenditures were approximately $830,000 in the third quarter of 2014, which included no CapEx reimbursement under our omnibus agreement with Delek US. Maintenance capital expenditures were approximately $480,000 and discretionary projects were approximately $350,000.

Total capital expenditures for 2014 are expected to be $9.9 million. This is a decrease from our previous estimate of $13.1 million and is related to timing of discretionary projects. The 2014 forecast of capital expenditure amount consists of $6.2 million of maintenance and $3.7 million of discretionary related projects.

With that I will turn the call over to Uzi for his closing comments.

Thank you Danny. We believe that we are on track to achieve our goals that we discussed on our last conference call to add $25 million to $35 million to annual EBITDA by the end of the first quarter of 2015. A portion of this growth is in place and is currently benefiting DKL.

For example, we have benefited from higher volumes on the Lion Pipeline system since March 2014 and further increases which took effect in July. Between now and the end of the first quarter of 2015, we expect the remaining parts of the growth plan to fall in place. We are improving the efficiency of our Tyler, Texas terminal to handle more track volume, so support Delek's planned expansion of its Tyler refinery.

Also, we recently purchased our third terminal in east Texas, which will allow us to well support Tyler. (Inaudible) that included crude oil storage tanks at Tyler and (inaudible) floating rack at El Dorado, are expected to be purchased from Delek US by the end of [the first quarter] of 2015.

In addition, as a part of our growth plan, we are currently in the final stages of negotiating a new agreement for the Paline Pipeline. All of these initiatives can be achieved with an estimated investment of $80 million to $85 million of capital.

As we achieve our growth targets in the first quarter of 2015, we will be moving closer to our goal of annualized run rate of $150 million of EBITDA by the end of next year. Our financial position remains solid and we continue to target a distribution increase of at least 15% per year in the future.

With that, Tasia, could you please open the call for questions?

(Operator Instructions) Theresa Chin, Barclays.

My first question is related to the pay line recontracting. Now that we're very close to the expiration of the current contract, can you provide us with an update of what the recontracted fee might look like and if not, can you tell us when you'll be ready to share that information?

That's a great question. We are in the final stages of negotiating a new contract. Obviously it's going to be, we think much better than the current contract, however that contract wasn't signed just yet. It's in the final stages of awarding and we expect this to happen in the next few weeks. Obviously the current contract is expiring by the end of the year.

So, because of different reasons, mainly business reasons and things related to the negotiations, we are not discussing numbers just yet, but it's embedded in the growth of $25 million to $30 million that we put as a target of ourselves until the first quarter of 2015.

Then secondly, in terms of the west Texas marketing rate, what should we think of as a good base of run rate from here? I understand that second quarter this year benefited from some idiosyncratic factors and it's up year-over-year, but back to around the same level of second quarter of last year. I just wanted to know, how should we think about this margin going forward?

Obviously, this will bounce with the market. By the way, the fourth quarter it bounced back from the [2.20], so we see better margins in the fourth quarter so far. A good indication, and it's new to us as well, but a good indication in our head right now is around $3.00 on an annual basis. It will change between quarters; 2.20 is probably not normal; it's too low. In fourth quarter we probably expect to be closer to normal, which we call $3.00 normal.

Lastly, on the revised CapEx guidance, I'm just curious, what were the projects that were pushed out further, related to the decrease in guidance?

Most of what got pushed out was the expenditures to expand the north Little Rock terminal. We developed the project scope while we were doing due diligence, but once we took over operations and were able to work with the various pipeline companies and other facilities in the area, we're modifying the scope of the project a little bit. We've been able to achieve much higher throughputs than we expected, with no CapEx. So we're kind of rethinking that scope.

Richard Roberts, Howard Weil.

A couple of questions for me. For one, I assume that we still probably have a little bit of a gap between what we can see out there on the growth side and what your target is for year-end 2015, so I assume that's going to have to be met with some acquisitions. Can you just update us on sort of what you're looking at, would you be willing to step out into new markets, into new basins, if you're strictly focused on assets that would integrate with DK's assets or more third-party focused? Maybe even easier, just what you're not interested in on the M&A side.

These are great questions, Rich. So I'll try to answer them one by one. First of all, we do have projects that are ahead of us that are both on the acquisition side as well as organic growth, as we did in the past. We announce them only when they are basically signed. A great example about that is obviously the small acquisition we just did, the Mount Pleasant and the Greenville. We negotiated that for a few months. We knew this was in the pipeline and only announced it when we signed that.

Now, we will need bigger acquisitions and we have them in the pipeline. Also we have other big organic projects in front of us. But we want to be cautious when we announce something and then it's not closed. So that's the reason we don't announce specific projects. However, we feel good about our goal of $150 million by the end of next year.

Second, in terms of the area. We think that the growth area that is attractive for us is areas that we know. However, it doesn't mean that it needs to be all DK related. These can be third-party related acquisitions. Mount Pleasant, you may say that it's related to DK, but it's actually supplying other customers. So these are the areas that we know and know how to buy assets or how to build assets that will be attractive to our operations.

So are we going to go to Alaska tomorrow morning? Probably not, but it's not necessarily an asset that will serve only DK.

And just kind of a minor one and I apologize if you already answered this, but I hopped on the call late. But it looks like year to date the trend on maintenance CapEx is trending pretty well below guidance. Are you expecting that we'll make that up in the fourth quarter or are some of the maintenance activities being pushed out to next year?

We won't see a lot of additional CapEx here in Q4, but we'll see some more coming in Q1. Since a lot of the DKL assets support the various refineries, we will do some maintenance CapEx activity in Q1 in coordination or in conjunction with the Tyler refinery expansion and turnaround. So it's just a spread from Q4 to Q1.

(Operator Instructions) Cory Garcia, Raymond James.

I guess a quick point of clarification on the prior west Texas wholesale; $3.00 is sort of a good range, I guess per barrel to think about a normalized rate. Does that include a contribution for RINs?

Yes.

About $1.00 or so per barrel of RINs?

Well, it depends. As you know, RINs fluctuate, but (inaudible). Also the benefit of ethanol. Now, I want to be clear on that, Cory, because it's a point of interest for everybody. That will move. There will be quarters with $2.00 and there will be quarters with $6.00. But if we look at it as long-term benchmark, $3.00 is a good number.

That clears things up and I guess at this point it still seems like you guys are mulling over some of the discretionary projects that could be hitting beyond sort of the Q1 2015 time rising. Is there any level of CapEx spend that at least we should be thinking about ballpark or is it still too early to sort of say?

It's too early. I'm just going to repeat our guidance from the past, that usually we target acquisitions not more than 7 to 9 times EBITDA. So there's no need to expect that we will pay 17 times or 13 times for acquisitions. We won't do this, these assets. By the way, still assets exist in the marketplace that we can improve their profitability and still pay 7 to 9 times.

Absolutely. And I guess kind of expanding on that M&A topic, sort of any color you guys are able to give regarding with the recent pull back we've seen in oil prices, I know a lot of the recent M&A on your standpoint has been more geared toward the refined product. Are we seeing M&A potential transaction values on the crude side come in a little bit or is it still too early and people are still waiting to see how things play out?

Exactly. I think that everybody sits on a big pile of cash and everybody is just sniffing around; $77, we visited that number only in the last three days, so it's too early. I know that you guys react quickly, but it's too early to get a good sense of that. However, I do expect if we really stay at these levels of $70 to $80, that there will be assets coming to the market and people that are more leveraged than us, that's the reason we keep our balance sheet with relatively low leverage, 2.5 times and improving. I believe that there will be more assets coming to the market.

Michael Blum, Wells Fargo.

Just one more question on just the environment. I think I know how the lower crude prices impact DK, but just in terms of the overall high level view of DKL's business, can you just talk about how the business may be impacted to the positive or the negative, assuming we stay in this kind of $80ish, $75 TI environment?

As you know, most of our contracts are on a fixed fee, so for the most part, it doesn't influence us much. However, there is one area in west Texas which enjoyed growth in the past and if drilling will go down, then maybe we'll see a little bit of pullback on the number of barrels that are being purchased.

We don't see anything like that happening. This is much longer-term. This is over years. Obviously if this were El Dorado and 80,000 barrels of demand for DKL was much higher in the past and if the demand from the refineries will continue the way it is, then we will see very minimal, if any influence on DKL's business.

If we do see a slowdown in drilling activity, could that impact some of these organic projects that you sort of have in line of sight but haven't announced yet?

Maybe one. I'm trying to think. Maybe one. All the rest, not really.

There are no further questions at this time.

Well, as usual, I'd like to thank my colleagues around the table here. I'd like to thank you investors and analysts for your interest in our company. But mostly I'd like to thank our employees, who make this company what it is. Have a great day. We'll talk to you soon.

This concludes today's conference call. You may now disconnect.