Delek Logistics Partners LP (DKL) 2015 Q2 法說會逐字稿

Good morning. My name is Shelley and I will be your conference operator today. At this time I would like to welcome everyone to the Delek Logistics Partners second-quarter earnings conference call.

(Operator Instructions)

Keith Johnson, you may begin your conference.

Thank you, Shelley. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners second-quarter 2015 financial results.

Joining me on today's call will be Uzi Yemin, our General Partner, Chairman and CEO; Assi Ginzburg, CFO; Danny Norris, CAO; and other members of our management team.

As 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 November 4, 2015 by dialing 855-859-2056 with a confirmation ID number 69595329. 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 second-quarter 2015 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. During the quarter our operations showed solid improvement as our DCF ratio increased to 1.5 times in the second-quarter 2015 from a reported 1.2 times in the first quarter of 2015. This was driven by acquisitions and interest contribution from assets supporting Delek's US Tyler refinery following its expansion in March.

On a year-over-year basis our DCF was approximately $21 million and EBITDA was $26 million for the second-quarter 2015. This compared to a DCF of $24 million and EBITDA of $28 million in the prior-year period.

Based on our performance we are pleased to announce an increase in our quarterly dividend to $0.55 per limited partner unit for the quarter ended June 30, 2015, which is a 3.8% increase from our first-quarter 2015 distribution per unit. This is our 10th consecutive increase and is 16% higher than our second-quarter 2014 distribution of $0.475 per unit.

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

Thank you Assi. For the second-quarter 2015 Delek Logistics reported net income attributable to all partners of $18.3 million, or $0.70 per diluted limited partner unit compared to net income attributable to all partners of $21.8 million or $0.87 per diluted limited partner unit in the prior-year period.

Our performance during the quarter benefited from fees associated with the El Dorado rail offloading racks and the Tyler crude oil storage tank purchased on March 31, 2015, acquisitions completed over the past year and a higher contribution margin from the Paline Pipeline compared to the second quarter of 2014. These factors in the second quarter of 2015 were offset by lower margin in the West Texas wholesale business. As a result, our contribution margin decreased to $28.8 million in the second quarter of this year from $30.2 million in the prior-year period.

Now I will spend a few minutes discussing our two reporting segments. Second-quarter 2015 contribution margin in our pipeline and transportation segment improved to $20.9 million compared to $13.8 million in the second quarter of 2014. The improvement was primarily attributable to increased performance from the Paline Pipeline due to the new agreements effective on January 1, 2015 and performance from the dropdowns purchased on March 31 of this year.

Contribution margin in our wholesale marketing and terminaling segment was $8 million in the second quarter of this year compared to $16.4 million in the prior-year period. This decrease was due to our West Texas wholesale business as the gross margin was $1.31 per barrel in the second quarter of this year compared to $6.52 per barrel in the prior-year period. This decrease in margin per barrel was primarily driven by a more competitive environment during the period.

Included in the gross margin per barrel was approximately $800,000 of higher cost due to ethanol fixed price contracts that were above average market prices in the second quarter of this year. In the year-ago period downtime at refineries in the region created a favorable supply-demand environment which improved the gross margin per barrel.

The margin per barrel in the second quarter included approximately $1.7 million, or $1.06 per barrel from RINs generated in our ongoing ethanol blending activities. This compares to a gross margin that included $1.1 million, or $0.68 per barrel from RINs in the second quarter of last year.

On the year-over-year basis volumes in the Tyler terminal and the East Texas marketing agreement were increased due to higher production rates at Delek US' Tyler refinery following the completion of its expansion project in March of this year. As of June 30, 2015, Delek Logistics' total debt was $317 million. We ended the quarter with approximately $378 million of unused availability under our $700 million credit facility.

Our leverage ratio was 3.2 times, well within the 4.75 times currently allowable under our credit facility. Capital expenditures were approximately $6 million in the second quarter of this year of which $1.4 of CapEx was reimbursed under our omnibus agreement with Delek US.

Total capital expenditures for 2015 are expected to be $19.8 million which includes $14.1 million of maintenance, $5.7 million of discretionary related projects. Included in the 2015 amount is approximately $4 million of CapEx to be reimbursed under our agreement with Delek US. This compares to total capital expenditures in 2014 of approximately $7 million.

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

Thanks, Danny. Over the past year we have increased our more stable DCF business to acquisitions, improved contribution of the Paline Pipeline and high utilization in our East Texas assets supporting Delek US' Tyler refinery. While our West Texas wholesale gross margin per barrel remains volatile as we continue to grow it is expected to have a smaller impact on our performance.

We remain focused on acquisition opportunities and with the recent change in commodity prices the environment has become more attractive as values have declined. The combination of a strong balance sheet, operations that have limited commodity exposure and a strong sponsor creates flexibility for us as we evaluate different options.

In addition, we continue to explore ways to partner with Delek US and the recent investment in Alon USA by Delek US may create additional growth opportunities for DKL. The combination of our financial position and growth initiatives should support our target of an annual distribution increase of at least 15% per year in the future.

With that, Shelley, would you please open the call for questions?

(Operator Instructions) Gabe Moreen, Bank of America Merrill Lynch.

Hi, good morning everyone. Quick couple of questions, I know Uzi you commented on the West Texas wholesale margins getting to be a smaller and smaller part of the business as everything grows.

But I think in the past you had given us guidance for expected run rate on wholesale margins. But given the commentary on drilling activity in West Texas should we think about this quarter being the run rate in terms of wholesale margins going forward in West Texas?

I honestly don't think so. I think this is a volatile market. Activity is down but I don't think that the benchmark that we use at least for now of $3 should be changed.

We said in the past that it's going to change. Now I realize that the activity in the market has changed but with the fact that Phoenix and the Arizona markets are very strong or right now they are very strong because of California I actually think that margins in West Texas may rebound. It doesn't mean that we will see $3 day in, day out but the $3 is a good benchmark.

Now one thing that affects that and we need to consider it ourselves is we used to have a very good ethanol business as well as the RINs business. That structure changed a bit. But on the other hand some of our competitors are doing other things in the area and we believe that margins may and should rebound.

Thanks, Uzi. And your comments on M&A both in the press release and on the call, can you just talk about I guess what you're seeing and also I guess the appetite that DKL might have to take on more commodity-sensitive assets and whether you want to ensure that DKL stays as fee-based as possible when you do engage in the M&A or if you do?

Well, that's a great question Gabe. You know I'm not telling you anything you don't know yourself and probably better than I do.

The pressure on E&P companies as well as the pressure on the MLPs is mounting with the commodity exposure. And we see more and more honestly some MLPs's that shouldn't be MLP to start with come under pressure. And we will continue to maintain our fee-based very stable growth long-term contracts under the DKL arrangement or structure.

It doesn't mean that there are no opportunities in the market that you can actually split the exposure with either the sponsor or somebody else and continue to grow the business. I do believe that there will be, and I said it probably 18 months ago, 24 months ago, we do believe that consolidation in the MLP spectrum as well as more assets coming online as a result of the E&P being under pressure will give us tremendous amount of opportunity for growth. That's the reason we maintain this strong balance sheet and we don't jump with our distribution.

As we mentioned the coverage ratio of 1.5, the leverage is around 3 times. Tremendous amount of opportunity to do something in the area. And as we proved in the past we can be very nimble and quick to react.

Great, thank you. Then I guess just last question for me is in terms of the ALJ midstream assets, maybe any update they in terms of your I guess sizing of those potential assets? And also maybe timing, is that timing dependent on any third-party M&A you might do?

I will put it this way, without me commenting too much about what they are doing they mentioned that they have these assets. Now obviously we are now involved with ALJ and we haven't decided to do much yet obviously. If we have decided if we decide to do that you will be the first one to know you in the market.

But obviously it's an avenue for growth. It's apparent that we see an avenue for growth, we just need to remember these are two different public companies and that will require arrangement for both companies, not only from DK.

Great, thank you, Uzi.

Theresa Chen, Barclays Capital.

Good morning. I have first a follow-up on Gabe's question around the Alon Midstream assets. It seems that even as recent as their June 2015 presentation that they still intend to carve out a logistics MLP and continue to talk about it publicly.

What's the likelihood in your opinion of that coming to fruition? And we're just all trying to gauge if these assets are actually going to be dropdown to DKL or not and I understand you don't want to comment explicitly on that but this could be the final piece of the puzzle to get to your $150 million annualized EBITDA run rate target by Q4 2015. So any clarity around this would be much appreciated.

Well, it's a great question. There's only one caveat to that. That question should be presented to Alon about their capacity and they need to make a decision what they want to do with their assets.

It doesn't mean that we as shareholders don't have an opinion about it. But by the end of the day that's a question that Paul Eisman needs to answer in his capacity as the CEO of the company.

Obviously as we look at opportunities at ALJ and I'm sure the sponsor, our sponsor will take this into account the opportunities that are coming from their midstream assets. But the clarity should come from the Company. That's one thing.

Second, I think I said it in the past and I'm going to say it again. We're confident with our $150 million EBITDA one way or another, so it's not that we changed our mind. We said $150 million, as we get out of 2015 we're confident of that $150 million EBITDA.

Fair enough. So an effort to get to that target and related to your comments about third-party M&A, should we expect something to be announced in the near term? What's your timeline on that?

There's no timeline on that. We already proved to the market that we can be fast and at the same time we can be patient.

The market wanted us to go fast on the distribution and we wanted to be patient in that regard. And on the other side we proved that we can find these midstream assets when other people don't hear about them. I do believe that with what's going on in the marketplace the fee simple, strong sponsor MLPs have advantage over other people without that structure.

So do we have any pressure? Probably no pressure at all. We're just committed to create value for our shareholders.

Thank you very much.

Mark Reichman, Simmons & Company.

Yes, just a couple of questions. First on the West Texas wholesale business, just wanted to spend a little more time on the gross margin and the potential for improvement there.

Could you just break that up into pieces in terms of assigning the amount that you would say was due to the at a market I guess ethanol, the fixed-price contracts versus your activities in terms of buying refined products from third parties and then selling them at your Texas terminals versus the RINs? And which of those components would you expect to improve in order to get back to that $3 a barrel?

Yes, this is Mark Smith. I think as you saw in our press release we had the $800,000 above market purchase of ethanol. And if you look at we sold about 17,000 barrels a day of product in West Texas and so I guess you can do the math and its $0.80 or so of the margin decrease is related to that.

So we see the long-term margin at least over $2. And obviously RINs came down from $0.70 to $0.42, $0.43 where they are now. So that's another piece of the pie.

And if I think if people who have been looking at the marketplace, in the Dallas market in June there was a big inversion in the diesel market due to all the production from the group and Dallas market was trading about $0.06 under the Gulf Coast during that month for diesel. So that had an impact in it.

As Uzi said I think we believe that over the long term the margins will be in the $3 range. Obviously, though, as we said they will be volatile depending on what's going on with the production.

I think if you saw yesterday's press release from our friends at Alon, they had record production out there in West Texas in the second quarter. So obviously the competitive market will be there and the market will continue to be volatile but we still believe on average at a regular ethanol price blending economics and RINs values that $3 is the number.

So do you think for the back half of the year that you could see the volatility in the gross margin? In other words could we see -- would you envision that we could see a swing back? Or do you think it's going to be a little more gradual to where maybe just your best, I guess your best guess there?

I think it will be a little more gradual as refineries, obviously we have a heavy turnaround season coming here in the fall. So that's going to have some effect on supply and demand in the group and the Gulf.

And so we've already seen the margin in July increase above that $2 number. So I think it will be gradual but we should see it recover by the end of the year, at least that's our forecast.

Okay. And then also just what are your expectations on the Lion Pipeline system volumes for the remainder of the year?

I'm not sure I follow you. Which --

The crude oil pipelines and the refined products pipelines look like the volumes were down a little bit year-over-year.

Yes. Well they are down a little bit but that's something that I wouldn't read too much into it. The throughput is back up on the side so the capacity will be something that you can assume.

Okay. And then I guess most of my questions are answered with respect to the ALJ. What other, just I think the projects, the joint venture projects I think those are pretty well known at this point. Is there anything else you can comment in terms of organic growth opportunities?

Well do you want to take that Assi?

Sure. As we mentioned before the project that if you've seen us reporting in West Texas in our mind are just the beginning of developing trucking and gathering business in West Texas. Delek by itself even without ALJ is buying over 100,000 barrels a day today in the Midland area. With the RIO Pipeline for the first time we'll actually have a place to put those barrels.

So we think that will naturally allow us not only to bring trucking to the area but also to develop a gathering business on the back of the RIO system. And we intend to do the same thing in East Texas. So when we look at organic we think this is where our future currently is going to be focused on.

And I would like to add one more thing to that if you don't mind. One big initiative to our Company is as we see more and more pressure on the middleman is to increase that gathering program. We're working very hard on that market, actually doing a lot of work around it.

We didn't announce it to the market yet but that's going to be a huge we believe engine, growth engine for our Company. We have a lot of knowledge in that area and the combination, the potential combination if there is a combination between Alon and Delek creates one of the biggest players in that area. So from a gathering standpoint you should expect more out of DKL.

Very much appreciated. Thank you.

Richard Roberts, Howard Weil.

Good morning, guys. A couple of questions for me this morning.

One of your larger peers was out last week announcing that they're going to look at dropping down their fuel distribution into their MLP. Can you just update us, is this something you're looking at now and maybe can you give us any idea of what kind of EBITDA potential that could represent to the MLP?

Good morning, Rich. I must say that you are persistent with that question and I will sound like a broken record. That structure actually fits MLPs.

It fits more mature retail business as we grow our business. And we are talking about now being, and if you look at the DK press release we had record gallons, these gallons continue to grow. So the business is becoming more and more mature.

That's something that we potentially look at. Obviously other, it's between $0.03 to $0.04, you're talking about here less than 0.5 billion gallons for DK only. Obviously there are other potentials here as you know.

And we as DK decides to move forward with more stores these gallons will continue to grow. So the method is very simple and that's one of the reasons why we're confident with our growth pattern.

And so it's probably not unfair to assume that if there was any kind of a combination between Delek and Alon they obviously have a retail footprint as well. That might give you the scale because it seems like scale is the bigger issue here.

Well, first of all the merger between us and Alon should happen and then after that we need to -- or between the sponsor and us should happen and then only then we need to make a decision. But that obviously one of the values that we see in doing something like that.

I want to be again clear that we have that structure that we continue to build these megastores or the sponsor continues to build these megastores. And that is one of the growth engines not only for the sponsor but potentially for DKL.

Got it. Thanks, Uzi.

And then just one more. Any updates on the Caddo Pipeline open season that you can provide?

Fred, do you want to --

I don't think we've got anything to update.

We have nothing to update. We'll probably do it in the future.

Okay, fair enough. Thanks, guys.

(Operator Instructions) Michael Blum, Wells Fargo.

Hi, good morning everyone. I think most of my questions were addressed but just it looked like the East Texas volumes were pretty high this quarter at least relative to what we were looking at. Was there anything going on there in particular that you can comment on?

Well obviously Delek expanded the Tyler refinery. We should expect this to continue to grow.

As you remember they expanded their refinery to 75,000. We are the marketing arm for that business, so there's no reason to believe that it won't grow.

Okay, great. And then just to clarify, I think what I heard you say before in terms of achieving the $150 million EBITDA run rate by the fourth quarter, effectively you think you'll do that with or without the Alon assets?

We obviously have different paths to do it, so we just need to make a decision which path to pick in order to create value for our shareholders. There are different avenues to achieve that. We just need that's an internal decision how to move forward.

Okay, great. Thank you.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you, Shelley. I'd like to thank management around the table. Obviously I would like to thank the Board of Directors, you investors for the continued confidence in us.

Mostly I'd like to thank our employees and the people that make this Company what it is. And we think that there is a clear path for growth for us, so very exciting times ahead of us. Thank you and have a great day.

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