Delek US Holdings, Inc. (NYSE:DK) Q3 2023 Earnings Call Transcript November 7, 2023
Delek US Holdings, Inc. beats earnings expectations. Reported EPS is $2.02, expectations were $1.36.
Operator: Good day, and welcome to the Delek US Third Quarter earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Rosy Zuklic, Vice President of Investor Relations. Please go ahead.
Rosy Zuklic: Good morning and welcome to the Delek US third quarter earnings conference call. Participants on today’s call will include Avigal Soreq, President and CEO; Joseph Israel, EVP, Operations; Reuven Spiegel, EVP and Chief Financial Officer; Mark Hobbs, EVP, Corporate Development. Today’s presentation material can be found on the Investor Relations section of the Delek US website. Slide two contains our safe harbor statement, regarding forward-looking statements. We’ll be making forward-looking statements during today’s call. These statements risk 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 here as well as 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 Soreq: Thank you, Rosy. Good morning and thank you for us — for joining us today. We delivered strong third quarter results. All segments performed well. Our team remains focused and drove improvements across our businesses. I thank each member of our Delek team for their contribution. From a macro perspective, during the quarter, we saw a significant volatility in the markets. Gasoline crack weakened, diesel crack CAC remained strong, driven by inventory levels continued at five-year lows. Given our higher distillate production relative to our peers, we’re at a competitive advantage. The refining segment ran well. We achieved a record total throughput during the quarter. Joseph will provide more details on our refinery operations in his remarks.
In logistics, we are investing in continued growth of our business. We benefited from our favorable permit location, which led to another record quarter. Given our strong portfolio performance, we are confident in DKL’s ability to exceed $100 million in quarterly EBITDA run rate by the fourth quarter of this year. Moving to slide four, reflecting on my first year as CEO of Delek. We have much to be proud of. When I return to Delek, I outlined my focus areas, safe and reliable operations, being shareholder-friendly and having strong balance sheet, unlocking the sum of the part value and improving the efficiency of our cost structure. We are very focused on these objectives. Our dedication to seek each one of them to completion has not wavered.
We have made progress in all of them. On the operations side, we enhanced our team with experienced talent. Together, we streamlined the structure and process toward our operation. This has led to a strong safety results. We achieved a total record throughput in our refining system. Earlier in the year, we successfully completed the Tyler turn out with their recordables on time and on budget. Post turnaround, the refinery is performing at higher yield and most importantly, record capture rates. On financial and shareholder returns. Over the past year, our logistics business achieved record EBITDA quarters. In Q3, retail achieved its highest EBITDA since COVID. We continue to be shareholder-friendly. 2 October, we repurchased $85 million of shares and including the latest increase raised the dividend five x in a row.
We improved our financial position by using our strong cash flow to reduce our net debt by $476 million during the year. On a strategic point of view, our $100 million cost reduction effort are well underway, and we are seeing early results. On unlocking value from top of the part, we have a clear strategy, and we are well on our way to meet our objectives. As you can see, we have been consistent. This resulted in tangible progress. Importantly, the achievements I just outlined position us well for the mid-cycle market environment, both from an operation and financial standpoint. In closing, we are pleased with our strong quarter. We will continue to drive further improvements and unlock value from our business. Now I would like to turn the call over to Joseph, who will provide additional detail on our operations.
Joseph Israel: Thank you, Avigal. Moving to slide 5. In the third quarter, our team processed a record high 306,000 barrels per day of total throughput. The focus on people, process and equipment helps us to build a solid organization to support safe and reliable operations. In the third quarter, the combination of favorable market conditions and strong operations performance led to $286 million of adjusted EBITDA contribution by the refining segment. In Tyler, total throughput in the third quarter was approximately 76,000 barrels per day. Production margin in the quarter was $23.66 per barrel reflecting improved reliability, yield recovery and a strong capture rate of 73%. Operating expenses were $4.74 per barrel including elevated utility cost at approximately at $0.50 per barrel due to high demand for electricity in the state of Texas late in the summer.
In the fourth quarter, the estimated total throughput in Tyler is in the 73,000 to 76,000 barrels per day range. In El Dorado, total throughput in the quarter was approximately 84,000 barrels per day. Our production margin was $12.57 per barrel. Operating expenses were $4.36 per barrel. Estimated throughput for the quarter or the fourth quarter is in the 81,000 to 84,000 barrels per day range. In Big Spring, total throughput for the quarter was approximately 65,000 barrels per day, driven by maintenance work, but still well within our guidance range. Our production margin was $15.92 per barrel including an estimated unfavorable $3.50 per barrel impact from the maintenance activities. Operating expenses in Big Spring were $1.37 per barrel, including approximately $0.80 per barrel of the unplanned activities and an additional $0.70 per barrel related to the elevated utility cost.
In October, we completed a planned outage to replace a reformer catalyst and a couple of reactors. As a result, the estimated fourth quarter throughput in Big Spring is in the 61,000 to 64,000 barrels per day range. We are very excited with our progress in Big Spring refinery. We have the right leadership team in place and we are pushing operational excellence to the next level. In the third quarter, we already improved throughput, capture and OpEx compared with the second quarter. And going forward, we are planning for the following improvements at the controllable level. Throughput up, approximately 5,000 barrels per day from our yield to-date 66,500 barrels per day performance level. Capture, up 15% to 20% from our year-to-date 52.6% level.
We are expecting to realize 65% of the improvement in 2024 and the remaining 35% in 2025. In Krotz Springs, total throughput was approximately 81,000 barrels per day. Our production margin was $12.45 per barrel and operating expenses were $5 per barrel. Planned throughput in the fourth quarter is in the 77,000 to 81,000 barrels per day range. In the third quarter, wholesale and asphalt marketing added about $35 million for the refining segment earnings compared with $80 million in the second quarter. This results are outside of our reported margins at each of the refineries and their associated capture rates. Wholesale marketing contributed about $20 million, down from approximately $60 million in the second quarter, and asphalt marketing contributed approximately $15 million compared with about $20 million in the second quarter.
Contribution of both businesses was impacted by rising oil price, but more importantly, allowed us to pull inventory even with record high throughput of our refining system. The resilient demand in our niche markets and the access to rack blending are a significant strength of our integrated downstream business model. With regards to the fourth quarter, our refining system plant throughput is in the 292,000 to 305,000 barrels per day range. We are well positioned to capture strong distillate margin environment with our 42% distillate yield capability. As a reminder, no major turnaround is planned until the fourth quarter of 2024 in Krotz Springs. In PKL, the team delivered another record quarter under operational excellence focus and growth.
I will now turn the call over to Rosy, for the financial variance.
Rosy Zuklic: Thanks, Joseph. Starting on Slide 6. For the third quarter of 2023, Delek US had a net income of $129 million or $1.97 per share. Adjusted net income was $132 million or $2.02 per share and adjusted EBITDA was $345 million. Cash flow from operations was $433 million. On Slide 7, we provide a waterfall of our adjusted EBITDA by segment, from the second quarter to the third quarter of 2023. The increase was primarily from improved results in refining, driven by higher throughput in Krotz in the third quarter. Logistics had a record quarter at nearly $97 million and Retail had another strong quarter with EBITDA of $16 million. Corporate segment costs increased compared with last quarter, largely due to bonus accruals.
Moving to Slide 8 to discuss cash flow. We built $80 million in cash during the quarter, ending the third quarter with a balance of $902 million. The $433 million in cash flow from operations reflects the strong performance of the quarter. Included in this amount is $177 million in favorable working capital. This was largely from improved inventory management. Investing activities of $59 million is mainly for capital expenditures. Financing activities of $294 million primarily reflects paydown of debt and return to shareholders. This includes $176 million of debt repayment, $25 million in buybacks, $15 million in dividends and $10 million in distribution payments. On Slide 9, we show capital expenditures. Year-to-date, total company, we have spent $302 million.
We estimate the full year CapEx to be in the range of $380 million to $390 million before any reimbursement. We expect to receive approximately $20 million of insurance proceeds, growth CapEx partially funded by producers as well as other reimbursements. Including this, net capital expenditures for the year, is in the range of $360 million to $370 million. Net debt is broken out between Delek and Delek Logistics on Slide 10. During the quarter, we built $80 million of cash and paid down $176 million of debt, ending the quarter with a net cash position. Slide 11 covers outlook items for the fourth quarter of 2023. In addition to the throughput guidance Joseph provided, we expect operating expenses to be between $210 million and $220 million, G&A to be between $65 million and $70 million, D&A to be between $90 million and $95 million, and net interest expense to be between $80 million and $85 million.
We will now open the line for questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Manav Gupta with UBS. Please go ahead.
See also 12 Best Travel Stocks To Buy Right Now and 16 Biggest Lab Grown Meat Companies in 2023.
To continue reading the Q&A session, please click here.