Delek Logistics Partners LP (DKL) 2024 Q3 法說會逐字稿

Thank you for standing by. My name is Joel and I will be your conference operator today. At this time. I would like to welcome everyone to the DKL's third quarter earning's call (Operator Instructions)

Well, I let's turn the conference over to Robert Wright, Deputy Chief Financial Officer. You may begin.

Good morning and welcome to the Delek Logistics Partners third quarter earnings conference call. Participants joining me on today's call will include Avigal Soreq President; Joseph Israel, EVP Operations; Reuven Spiegel EVP and Chief Financial Officer; and Odely Sakazi SVP Delek Logistics. As a reminder, this conference call will contain forward-looking statements as final under the federal securities laws, including statements regarding guidance and future business outlook.

Any forward-looking statements made during today's call involve risks and uncertainties that may cause actual results to differ materially from today's comments factors that could cause actual results to differ are included in our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal for opening remarks.

Avigal?

Thank you, Robert. Delek Logistics Partner had another record quarter. we reported approximately $107 million in quarterly adjusted EBITDA. We are pleased with direct logistics continued strong performance.

DKL is a premier full service crude, natural gas, and water provider in the prolific Permian basin. And our recent action have significantly enhanced our position. In Q3, of 2024 we closed several important transactions. First, on August 5, we amend and extend contract between DKL and DK for a period of seven years. Second, we completed the acquisition of Delek portion in Wink to Webster Pipeline.

W2W is a premier crude oil pipeline backed by investment grade counterparties. It increases the overall asset quality of DKL and enhanced DKL payment position. Third on September 11, we closed the acquisition of H2 Midstream. We're excited about our combined offering in the Midland Basin.

While it's still early, this combination is already more attractive option for our customers and is presenting several cost and opportunities in the data base and we are also making good progress on our processing plant expansion and still expect to complete the expansion on time and on budget in the first half of 2025. As discussed previously, the plan is already subscribed and we are making progress on completion. We are already seeing additional opportunities around solar gas treatment.

On October 29, the board of directors approved an increase in the quarterly distribution to $1.10 per unit. We are very excited about the prospect of Delek Logistics, DKL is seeing several organic and inorganic growth opportunities, and we are taking prudent approach to growth. DKL is shown strong track record of delivering value to unit holders. We expect to continue on our value creation test moving forward and we will continue to grow our distribution in the future.

I will now hand it over to Reuven.

Thank you. As Avigal mentioned, we are growing Delek Logistics with prudent management of liquidity and leverage. We have managed liquidity throughout the year by accessing debt and equity markets. We currently have approximately $780 million of liquidity post the recent equity offering. We are also managing our leverage as we get into core spending period on our new gas processing plant expansion.

Moving on to our third quarter results. The third quarter adjusted EBITDA was approximately $107 million compared to $98.2 million in the same period of '23 distributable cash flow as adjusted was $62 million. And the DCF coverage ratio was approximately 1.1 times.

We expect this ratio to steadily move back above our long term objective of 1.3 times in the second half of 2025. As we realize the benefit of the various initiatives Avigal just spoke about as for gathering and processing segment adjusted EBITDA for the quarter was $65 million compared to $52.9 million in the third quarter of '23. The increase was primarily due to higher throughput from Delek Logistics Permian Basin and assets and small contribution from H2O post the transaction which was closed in mid-September. Wholesale marketing and terminating adjusted EBITDA was $24.7 million compared with $28.1 million in prior year.

The decrease was primarily due to lower wholesale margins, storage and transportation adjusted EBITDA in the quarter was $19.4 million compared with $17.9 million in the third quarter of '23. The increase was mainly driven by higher storage and transportation rates. And lastly, the investment in pipeline joint venture segment contributed $16.6 million this quarter compared with $9.3 million in the third quarter of '23. The increase was primarily from the Wink to Webster drop on contributions.

Moving on to capital expenditures. The capital program for the third quarter was $65.2 million of which $53.4 million was allocated to the new gas processing plant. The remainder of the spend in the quarter was the growth projects, namely advancing new connection in the Midland and Delaware gathering systems, along with our previously announced capital budget for 2024. We expect to spend a total of $90million to $100 million in the second half of '24 on the new gas processing plant.

With that, we can open the call for questions.

Thank you. The floor is now open for questions. (Opertor Instructions)

Doug Irwin, Citi.

Hey, thanks for the questions. I just wanted to start with the processing plant. Looks like you've already spent over half of the expected CapEx there. Just wondering if you could talk about the progress and any updated expectations on timing and then just curious if you could talk about the potential solar gas opportunities at this point, and DKL's ability to potentially take advantage of the need for some more solar gas treating in the Delaware?

Yeah, thank you, Doug for the two great questions. So first of all a progress around the plant that goes very well. We're very happy with the contraction and the commercial side of that. So that's absolutely going the right way. Obviously, as you heard on my prepared remark -- remarks, we see opportunity around our, and which are very attractive. I would put it this way and expect that we'll come back to you about that, sooner than later. Odely, do you want to be more specific about the progress of the gas plant?

Yes, please. Avigal Thank you. And Doug, I appreciate the question. So, regarding the progression, as we mentioned before, everything is going very well both on schedule and also from a cost perspective, as we mentioned, we are looking to have the plant ready on the first half of 2025 which is still the projection, everything is progressed very well from a construction standpoint all civil work is already been started, major equipment is there. So we're really happy about the progress about it and also on the schedule and also on the cost.

On the solar side, as Avigal mentioned it's an opportunity that it's something that is real interesting and we're excited about that part of the 3bear acquisition, which now is DPG we have the two AGI wells permits that we are looking to continue to use that. And as I mentioned more to come around that, but we're very excited about that opportunity for us.

Yes Doug, as you probably saw, we see a very attractive valuation for those assets over there, and that's something that they will come back to you sooner than later.

Great, thanks for that. And then my second question is just on Midland's volumes. It took a little bit of a step lower this quarter. Could you maybe just talk about what trends you're seeing there? And then maybe if you could also provide some more details on the acreage dedication that was announced last month, just getting sort of guideposts around MVC's or volume expectations moving forward would be helpful. Thanks.

Yeah Doug, absolutely. So that we are really fortunate to have the system, the DPG on the location. We are, we have, we see a great value in the area. The acreage dedication deal that we did when we announced is extremely acuity for us and will give a more color around it.

Yeah, thank you Avigal. So, Doug, as you mentioned, we are -- we've done around 185 in the third quarter. This is kind of a mix of two things, one, the project timing execution. And also, as we mentioned before, we saw a consolidation in the GP and landscape. So we see optimization around the rigs for our producer and also moving some of the rigs to a new acreage. So we are still looking to be around 190 in DPG by the end of the year and above 200 in 2025.

As mentioned, the 50,000 acreage that we just add in DPG is something that we're really excited about. The fact that we're able to continue to grow the acreage that's dedicated to us in DPG in an area that like the Midland area where it's a very mature area from that standpoint. So from a volume standpoint, this is where we're going to see an incremental to go above the 200 also getting even further beyond for 2026 as well.

Got it. Thank you.

Thank you, Doug, I appreciate you.

Neal Dingmann, Truist Securities.

Good morning. My question is just on H2O midstream a real unique acquisition. I just wanted to again, you talk a little bit on the integration. I'm just wondering how do you envision this? You mentioned kind of the upside that will mean.

I guess I have two questions here, how this will sort of integrate with the 3Bear assets? And you know that how much quicker do you think you'll envision sort of call it incremental third party cash flow as a result of having this combination?

Yeah. So H2O midstream is on the DPG side of the area and it goes very well with the system we've built over the over time integration is pretty much done. We can say that the people of H2O are part of the Delek Logistics team. They are part of our partnership. We are very pleased with the integration both on the G&A side, the accounting and it system and the business development side and also the operation side.

For example, yesterday, we just had a great meeting with their team and we're really blessed to have them on our shop and on a more strategic basis, obviously, having the water and the crude in this area, give us a bundling sale opportunity and take our discussion with our customer to the new level and we are very pleased about it. So that's a really good one.

No, I can't wait to see that. And then the second question just on capital allocation specifically, How do you all think about potential distribution growth versus, you know, debt payment or where you would like, your leverage or distribution coverage to be?

Yes. So we are very proud Neal about the fact that we increased our distribution 47 times in a row with that. We will, I said it very clearly that our goal is to continue with the increase of distribution. And we are going to push that forward. And the long term leverage ratio that we are targeting is 3.5 times . Our job is obviously to balance a between growth opportunity, the liquidity, the leverage, the cover. And that's what we are doing, we gave a lot of growth opportunities around that area and Odely. do you want to talk about it more.

Yeah, absolutely. And as Avigal mentioned, we are in a growth mode in Delek logistics and kind of managing all of that and make it in a very sustainable way as well. We did mention about the additional acreage that we got in TPG also the implement of H2O and associated synergy around that in the DPG area along with also the gas plant or the new gas plant, along with a lot of need for infrastructure that we see in the Delaware as along with also solar.

So, all those opportunities is something that we have two assets in the most prolific location in the United States, both on the middle side and also on the Delaware side. So we're really excited about those opportunities.

Makes sense. Thank you.

Thank you, Neal.

With no further questions that concludes our Q&A session. I will now turn the conference back over to the President Avigal for closing remarks.

So I want to take my friends around the table for the great progress we are doing with our partnership to the board of directors that support the progress we are doing and the to the investor that join our call and to invest in our share and investing in us and first and foremost to our great employees that make this company great to work for. Thank you. And we'll talk again in the next quarter.

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