Delek Logistics Partners, LP (DKL) Earnings Call Transcript & Summary

Thank you for standing by. My name is Jael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners First Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Robert Wright, EVP and Chief Financial Officer.

Good morning, and welcome to the Delek Logistics Partners First Quarter Earnings Conference Call. Participants joining me on today's call will include Avigal Soreq, President; and Reuven Spiegel, EVP. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including statements regarding guidance and future business outlook. Any forward-looking information shared during today's call will 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 Partners had another record quarter. We reported approximately $117 million in quarterly adjusted EBITDA, placing DKL on track to deliver on its full year EBITDA guidance of $480 million to $520 million. After transformational 2024, Delek Logistics continues to make substantial progress in improving its position as a premier full-service crude, natural gas and water provider in the most prolific area of the Permian Basin. As we have communicated in the past, we are in the process of increasing our economic separation from DK. This week, we announced intercompany transaction, which further increased this economic separation, bringing third-party contribution to our cash flow from 70% to around 80% on a pro forma basis. This intercompany transaction, along with our acquisition of H2O and Gravity, significantly enhance our competitive position in the Midland Basin. In the Delaware Basin, we are in the commissioning phase of the new Libby plant expansion, and we expect to fill the plant to capacity in the second half of 2025. We are also making progress on acid gas injection and sour gas handling capabilities in the Libby Complex. We expect to start spudding our AGI gas well shortly. AGI wells and sour gas treating capabilities enhance our competitive position in the Delaware Basin and will provide good runway of growth for Delek Logistics in the future. Despite the near-term volatility in crude prices, we like our competitive position in the Delaware Basin, which we believe will continue to grow. As the Delaware Basin grows, we will continue to grow the partnership through prudent management of leverage and coverage. I'm also pleased to announce that the Board of Directors has approved a 49th consecutive increase in the quarterly distribution to $1.11 per unit. To conclude, we are very excited about the prospects of Delek Logistics. We expect to continue our value creation path moving forward and will continue to grow our distribution in the future. I will now hand it over to Reuven, who will provide more details on our operations.

Thank you, Avigal. As Avigal mentioned, we are excited about the future for Delek Logistics and continue to work diligently to strengthen our advantaged Permian position. Let me start with the Delaware Basin. We are pleased to announce that we have started the commissioning of our Libby 2 gas plant, a time frame that is less than 7 months following the commencement of construction. We are very proud of our team for this outstanding accomplishment. As a reminder, at Libby 2, we are adding 100 million to 120 million standard cubic feet per day of incremental capacity, which we expect to realize through the course of the year. Our planned CapEx for Libby 2 does include investments that will allow us to utilize for future expansion of the Libby Complex. As Avigal mentioned, we are also adding sour gas treating and gathering capabilities. We are in the process of activating the first of 2 AGI wells, which will allow us to sequester acid gas. We believe we have differentiated ourselves in the market because of our unique offering of expanded gas processing in addition to our sour gas handling capabilities. Additionally, since we are one of the few companies, which can handle crude, gas and water in the Delaware, our natural gas G&P expansions are opening opportunities for us on crude and water gathering. Furthermore, our 2 recent water acquisitions are exceeding our expectations. We are currently in the process of integrating the 2 water gathering system from H2O and Gravity, and this integration has helped us enhance our combined crude and water offering in the Howard, Martin and Glasscock counties in the Midland Basin. Finally, we continue to look for opportunities to make our operations more efficient with a target to improve margins across our operations. With that, I will pass it on to Robert.

Thank you, Reuven. As both Avigal and Reuven have mentioned, we are continuing the growth and deconsolidation story of Delek Logistics, while maintaining focus on a healthy management of liquidity and leverage. As previously announced, DKL has authorization to buy back common units of up to $150 million from DK through 2026. During the first quarter, DKL repurchased a total of $10 million worth of units under this authorization. Post the closing of our acquisition of Gravity and the significant progress we have made on the Libby 2 construction, we currently have approximately $450 million of available liquidity. As Avigal mentioned, we closed the acquisition of Gravity on January 2. This acquisition was made through a combination of cash and units, which Gravity sponsors have subsequently liquidated in the market as of the end of April. These additional units in the market helped to improve DKL's overall trading liquidity. Moving on to our first quarter results. The first quarter adjusted EBITDA was $117 million compared to $102 million in the same period of 2024. Distributable cash flow as adjusted was $75 million and the DCF coverage ratio was approximately 1.27x, which we expect to continue to rise throughout the remainder of this year. For the Gathering and Processing segment, adjusted EBITDA for the quarter was $81 million compared to $57.8 million in the first quarter of 2024. The increase was primarily due to the acquisitions of H2O and Gravity Midstream. Wholesale Marketing and Terminalling adjusted EBITDA was $18 million compared to $25 million in the prior year. The decrease was primarily due to the seasonal weather impacts driving lower wholesale margins. Storage and Transportation adjusted EBITDA in the quarter was $14 million compared with $18 million in the first quarter of 2024. The decrease was primarily due to the amend and extend renegotiation we completed last summer. And lastly, the Investments in Pipeline Joint Ventures segment contributed $10 million this quarter compared with $8 million in the first quarter of 2024. The increase was primarily due to the contribution from the Wink to Webster drop-down in August of last year. Moving on to capital expenditures. The capital program for the first quarter was approximately $72 million, of which $52 million was due to the significant progress made in the construction of the Libby 2 gas processing plant. This amount includes $15 million for future potential expansion opportunities at the Libby site. The Libby 2 gas plant remains on track from a timing and cost perspective. The remainder of the capital spend for the period was growth projects, namely advancing new connections in the Midland and Delaware Gathering Systems. As to our outlook for the balance of the year, we continue to remain on track for the EBITDA guidance we laid out for the full year of $480 million to $520 million. With that, we can open the call for questions.

[Operator Instructions] Your first question comes from the line of Doug Irwin of Citi.

I was hoping to start by just getting a little more detail on the intercompany agreements that you announced. Did this actually involve assets changing hands? Or was it more driven by recontracting? And then just looking forward, are there more opportunities to optimize the footprint internally? Or are most of the remaining deconsolidation steps probably more external at this point?

Doug, it's Avigal. Good morning. Thank you for joining us today, and thank you for your support. I'll let Robert, our partnership CFO, to pick up on that. Please, Robert.

Yes. Thanks, Avigal. What we announced today was another important milestone in our journey to be an independent company. The related party transaction enabled us to clean up some of our contracts between DK and DKL. The effort helped to advance our deconsolidation efforts as we were able to move some of the refining-related activities from DKL back to DK. And importantly, to DKL, we also moved some midstream-related activities from DK to DKL. It's important to note that as a result of this transaction, there was no net material impact to our EBITDA of either entity. One of the other important benefits of this transaction was that it helped increase DKL's third-party EBITDA to approximately 80% on a pro forma basis, which should help further drive the mutual goal of economic separation with DK.

Okay. Understood. That's helpful. And then maybe a follow-up more on the macro side. You're obviously more dependent on third-party producer activity today than you've been in the past. Just wondering if you could talk about what you're hearing from customers on your acreage given the current macro environment? And then just any detail you're willing to share around your overall contracting mix, particularly for the water assets you've acquired over the last year would be helpful.

Yes, absolutely. I will take that question. So if you are looking holistically on our activity, we look at the Midland -- I will start with the Midland Basin, right? Midland Basin, we have a very strong customer base producer over there. We see stable volume, and we are happy with what we see. And as you know, we just finished 2 very timely acquisitions that allow us to have a combined offer. And why is that so important? Because we see, as we speak, water volume goes up, not down. And that gives us the compelling offering that we are giving is very, very good for us in that basin. In the Delaware, it's probably the lowest, especially in our area, the lowest breakeven for [ share ] in the entire nation. You have seen -- I think we provide a slide that shows that most of our acreage in this area is still -- was not drilled. So that's a very good positive as well. And when we are -- and we had gas that we didn't really able to treat because of size that we are moving into the plant we're just finishing on the order of 20 million to 30 million scf a day. The combined offer in this area of these streams give us definitive competitive advantage and a lot of other opportunities. So we are in a good day -- we are in a good spot. We are happy about the offering we have, and we look forward. But I allow, Reuven, that is very close and making a lot of great progress in this business to chime in, please.

Yes. Thank you, Avigal. Just maybe some color on a couple of points. As far as our contracts, we have limited direct commodity exposure with strong counterparties. In the Midland Basin, we actually forecasted even in some volatility, the produced water volumes to increase. As far as our CapEx, it was heavy '24 and first half '25. We don't have material investment for the second half. So that should give us a lower run rate as far as CapEx and expenses. And the gas plant ramp-up was actually -- the whole idea of the Libby 2 was twofold: one, to fulfill demand that already existed that we weren't able to suffice; and the second one is dedicated acreage growth, which Avigal just addressed. And in addition to all that, we bring one more component to the formula, which is the sour and water handling capabilities. So all that together makes us feel very comfortable about where we are.

Doug, I want to emphasize the sour capability we have. The long time on that in New Mexico is very long, and we are very fortunate about that, and that give us a very good competitive advantage that most of the plant in the area doesn't -- just doesn't have and probably will not have.

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

Absolutely. So I would like to thank management team around the table, our Board of Directors, our investors that like the story and invest in our unit, and most importantly, to our great employees that make our partnership so good. Thank you.

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