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Delek US Holdings (DK) Fully Acquires Alon USA Energy

Zacks Equity Research

Delek US Holdings, Inc. DK announced that it has acquired the remaining outstanding shares of Alon USA Energy, Inc. Per the agreement, existing shareholders of Alon USA Energy will be compensated with 0.5040 Delek US share for each Alon share they hold, with cash paid instead of fractional shares.

Benefits of the Acquisition

In Apr, 2015, Delek US Holdings first announced its decision to acquire approximately 48% of Alon USA Energy, which accounted for about 33.7 million shares of the latter. The initial aim of this acquisition was to broaden the asset diversity of Delek US, while offering future growth opportunities. Post the closing of the 100% acquisition, Delek US will hold approximately 82 million shares outstanding of Alon USA.

With the completion of 100% of Alon, Delek will unlock an estimated EBITDA of $70–$85 million annually from the former’s asset through potential drop downs to Delek Logistics Partners LP DKL in the future. The company expects that it will create a platform for future logistics projects, which will support a larger refining system.

The completion of the acquisition will give rise to a combined Permian-focused company with operations in all broad activities such as refining, logistics, retail and marketing altogether. It is expected to be highly accretive to Delek US’s earnings per share in 2018. In addition the combined company is expected to achieve annual synergies of $85 million to $105 million in 2018.

This will strengthen the presence of Delek US in the Permian Basin with an increased access to Permian sourced crude and will make the combined company one of the largest buyers of Permian sourced crude among independent refiners.

Current Refining Scenario in the U.S.

President Donald Trump plans to impose heavy tax on corporates that import goods in the U.S. With this step, he aims to encourage local manufacturing and domestic jobs. His decision is expected to affect many industries one of which is the Oil and Gas - Refining and Marketing industry. (Read more: How Trump's Border Tax Would Hit U.S. Refiners)

Although U.S. is one of the largest producers of oil globally, a number of domestic refiners, especially the ones located along the Gulf Coast’s vast refining sector and in the Midwest, prefer to import crude from countries like Mexico, Canada and Venezuela. This is because the refining units of these companies were constructed or modified about a decade ago i.e. prior to the shale revolution and are configured to refine the heavy/sour grades of oil coming from outside suppliers.

With the imposition of any such hefty tax, these units will be highly affected, which might lead to a rise in domestic crude and fuel prices. Companies like Chevron Corp. CVX, and ExxonMobil Corp. XOM are expected to bear the brunt of the proposed tax hike.

Price Movement

Shares of Delek US have gained 95.2%, significantly outperforming the Zacks categorized Oil And Gas - Refining And Marketing Industry’s gain of 10.8%.

This could be because of the company’s strong balance sheet along with rebound in the price of petroleum in the last few months.

Zacks Rank

Delek US currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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