Delek Logistics (DKL) Acquires Big Spring From Delek US
Delek Logistics Partners, LP DKL and Delek US Holdings, Inc. DK announced a logistic asset dropdown agreement. Through this agreement, Delek Logistics acquired Big Spring Gathering System from Delek US for a consideration of $100 million in cash and 5.0 million common units, representing limited partnership interest in Delek Logistics.
This transaction, which came into effect in Mar 31, 2020, will expand the firm’s operation in the midstream segment. The Big Spring Gathering System is a nearly 200-mile crude oil gathering system with around 350,000 barrels per day throughput capacity located in Howard, Borden and Martin Counties, TX. The acquired assets of Big Spring are expected to generate incremental annual EBITDA in the range of $30-$32 million and be immediately accretive to Delek Logistics' distributable cash flow per unit.
Impact of Declining Prices
Declining commodity prices, and delayed expansion plans of oil and gas companies could lower demand for midstream and pipeline services in the near term. However, the Big Spring Gathering System has a minimum volume commitment of 120,000 barrels per day and 50,000 barrels per day connection to a third-party pipeline system, which will safeguard the interests of Delek Logistics amid this difficult period.
However, the $2-trillion economic stimulus package did not assure any benefit for the struggling U.S. oil and gas companies. If the prices continue to remain low for a longer period of time, it will ultimately result in lower production volumes from drillers, increase the possibility of bankruptcies of highly-levered oil and gas companies, as well as hurt the prospects of midstream service providers.
Oil and gas companies are lowering capital expenditures, as well as delaying expansion plans to counter the challenges posed by the drastic drop in crude oil price. Occidental Petroleum OXY lowered its expenditure plan twice in March 2020 to preserve liquidity. Likewise, we have seen pipeline operator ONEOK Inc. OKE lowering its capital expenditure for 2020 and temporarily suspending expansion plans to cope with this unprecedented situation.
Zacks Rank
Delek Logistics currently has a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price Performance
Delek Logistics’ units have underperformed the industry in the past 12 months.
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