Delek Logistics Partners LP (DKL) 2020 Q3 法說會逐字稿

Good day, and welcome to the Delek Logistics Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note that today's event is being recorded.

At this time, I would like to turn the conference over to Blake Fernandez, Senior Vice President of Investor Relations. Please go ahead.

Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners' Third Quarter 2020 Financial Results. Joining me on today's call will be Uzi Yemin, our general partner's Chairman and CEO; and Reuven Spiegel, CFO; as well as 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. 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 third quarter press release.

On today's call, Reuven will begin with financial overview. I will review results, and Uzi will offer a few closing strategic remarks.

With that, I will turn the call over to Reuven.

Thank you, Blake. Our third quarter performance on a year-over-year basis benefited from relatively stable baseline business operations, contribution from the recent asset drop-downs along with business initiatives and asset optimization. Our distributable cash flow was approximately $59 million in the third quarter 2020 compared to $34 million in the third quarter of 2019.

Net income attributable to all partners increased approximately 52% over the prior year period. Our DCF coverage ratio was 1.5x for the third quarter 2020 compared to 1.1x in the prior year period. EBITDA was $68 million, which represents 32% increase over prior year period.

Based on our performance and outlook, we increased our quarterly distribution to $0.905 per limited partner unit for the quarter ended September 30, 2020. This distribution will be paid on November 12, 2020, and represents a 0.6% increase from second quarter of 2020. This is our 30th consecutive quarterly increase and is 2.8% higher than our third quarter 2019 distribution.

At September 30, 2020, DKL had approximately $89 million of available capacity on our $850 million credit facility. Our total debt was approximately $1 billion and total leverage ratio was 3.9x, which is within the 5.5x currently allowable under our credit facility. Finally, during the quarter, we announced the elimination of the incentive distribution rights and conversion of the 2% general partner interest held by our sponsor, DK, into noneconomic interest in exchange for 14 million newly issued DKL units and $45 million in cash.

Now I will turn the call over to Blake to discuss the results.

Thanks, Reuven. In our Pipelines and Transportation segment, the third quarter 2020 contribution margin was $46 million compared to $27 million in the third quarter of 2019. This increase was primarily attributable to the recent asset drop-downs, including the Big Spring Gathering and Trucking Assets. Additionally, operating expenses decreased to $11 million in the third quarter of 2020 from $13 million in the prior year period.

In our Wholesale Marketing and Terminalling segment, contribution margin was $21 million in the third quarter of this year compared to $19 million in the prior year. Operating expenses came in $2 million lower than the same period of 2019.

During the third quarter, equity income from our crude oil joint venture was approximately $5 million compared to income of $8 million in the prior year period. Capital expenditures were approximately $3.2 million in the third quarter, which consisted of $3.1 million of discretionary spending and $100,000 from sustaining maintenance. For full year 2020, our total gross capital expenditure forecast is $21 million, which includes $16.5 million of discretionary and $4.5 million of maintenance capital.

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

Thank you, Blake, and good morning, everybody. DKL continued to deliver consistent operational performance despite this difficult macro environment for energy. We announced the 30 consecutive increase in the quarterly distribution and remain on track to deliver 5% distribution growth this year, while achieving our year-end guidance level for both distribution coverage and leverage ratio.

The Red River pipeline expansion came online during the quarter, and we continue to develop internal business initiatives and cost optimization that should drive longer-term value for shareholders. Additionally, the simplification of the IDR lowered our cost of capital and better positions us to pursue growth opportunities. Lastly, I would encourage you to review our new Delek sustainability report, published in September, which includes DKL.

With that, operator, can you please open the call for questions?

(Operator Instructions) Today's first question comes from Spiro Dounis with Crédit Suisse.

I'd like to start out with West Texas marketing margins. It came back pretty aggressively this quarter. I think highest since we've seen since about 3Q last year. Can you just walk through some of the driving factors behind why it came back so much even beyond first quarter levels? And then how sustainable you think that is going forward?

Spiro, this is Uzi. And I'm sure Avigal will put more color into it, if needed. You probably remember that the West Texas market thrive when RINs prices go up as we have the space and that market is a market where we sell it together with the RINs. So I don't know how sustainable it is in terms of the RINs. But as long as the RINs stay elevated, we should benefit from that.

Avigal, do you want to add anything?

No. Thank you for the question, Spiro.

Yes. No, no. Okay. Perfect. That makes sense. Second question, just thinking about your growth longer term. Obviously, pretty tough year for refining in general, and DKL has been kind of a standout amongst a lot of the challenges.

Just curious how you're thinking about your goal to get to $400 million of EBITDA over the next 2 to 3 years, just given all those challenges more broadly. And thinking about specifically around Krotz Springs and the over $100 million of midstream opportunities that bridge you to that EBITDA goal. Are those opportunities still there? Have they been pushed to the right? How are you thinking about that trajectory here?

That's a great question because we are asking ourselves the same questions, and I think we have a good answer. So first of all, the big portion of the logistics to over the next 2, 3 years is W2W. As you know, W2W, the first portion has started. And we're already -- not through DKL but through DK, we see the benefit of some of the commercial agreements we have with producers around that. That would show up at DK with a magnitude of around $25 million to $30 million. It's not at DKL just yet. But W2W is coming to fruition, and that's a big portion.

The second portion is Krotz Springs refinery. We do have -- we are looking at another project at Krotz Springs. We're looking into some activities that involve tankage and other products, which we're not ready to announce just yet. But that may offset a big portion of what we were thinking in the drop-down of Krotz Springs if the market doesn't come back. If the market comes back and then we are at the 400 -- or $375 million to $400 million that we mentioned, probably sooner than the 2, 3 years that you mentioned. I hope that helps.

Your next question comes from Ned Baramov with Wells Fargo.

Could you share your latest thoughts on the MLP strategy? You have previously talked about a potential rollout phase 1 alternative, and you have also considered monetization of DKL units by the sponsor, specifically the units received as part of the IDR transaction. As of today, are you leaning more towards 1 of these 2 strategies, given the current environment?

These are macro questions that are -- I'm sure every company asks themselves the same question. So let's take it one by one. I think you had 2 or 3 questions in your comments.

So the first one, the MLP market is, as you know, because you cover it much more than I do, has its own challenges regardless of the macro environment as a result of the pandemic. But as you know, if there is a change in the tax code and taxes go up, then MLPs may come back in favor. So that's one comment.

The second one, rolling it up or selling units. DK -- selling units obviously is not a DKL decision; it's a DK decision. DK is very comfortable with its cash position. And I don't see any reason why we should sell units just because the units are $30. Because we are -- we do get -- DK is getting 12% return, which is more or less what DK wants to get.

Rolling it up, we made a strategic decision 2, 3 years ago before all this started, that MLP or logistics assets will be a priority for our company. I'm sure you remember that. But only a year ago, there were doubts that we can get to $200 million EBITDA. And here we are with almost $280 million on an annual basis and growing because of all the projects that we have.

So strategies don't change over much. So we think that we should continue to grow DKL. In the current environment, we should continue to look at other ideas. Obviously, cost of capital has changed, which to our -- honestly, to our benefit because we performed a little better than others. So I don't see us rolling it up at this point. I hope I answered all the aspects of your question.

Yes, you did.

(Operator Instructions) At this time, there are no further questions in the queue. And this concludes our question-and-answer session. At this time, I would like to turn the conference back over to Uzi Yemin for any closing remarks.

Well, thank you. Thanks, again. I'd like to thank my friends around the table. I'd like to thank my colleagues. It's another great work for DKL. The strategy actually works. And obviously, it couldn't happen without our great employees and the support of the unitholders and our share -- and our Board of Directors. We are very proud of what we achieved in this tough environment. Have a great day. We'll talk to you soon. Thank you.

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