Delek US Holdings, Inc. (NYSE:DK) Q2 2023 Earnings Call Transcript
Delek US Holdings, Inc. (NYSE:DK) Q2 2023 Earnings Call Transcript August 7, 2023
Operator: Good morning and welcome to the Delek US Holdings Second 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 second 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 risk and uncertainty 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: Good morning and thank you for joining us today. During the second quarter, we delivered solid financial results. Our team executed well and stayed focused on our key objectives. We continue to do what we said we will do. We kept our commitment to return value to shareholders. We target a dividend that is competitive and sustainable. Giving the market outlook, our share buyback program give us the ability to further reward our investors in the near and mid-term. Year-to-date, we have returned $95 million, both dividend and share buybacks. Since June of last year to the end of this week, we have returned close to $275 million to investors. We also recognize there is a value in a strong balance sheet and financial flexibility.
We continue to improve the efficiency of our cost structure. G&A improving the quarter and OpEx will follow. I'm pleased with our progress. Rosy will give more details in the financial section. Turning to the operation during the quarter. We ran well to most of our system, improving the safety and liability of our Refining system is fundamental. During the quarter, we made steps in the right direction. We continue to make good progress. Our Refining segment reflects strong contribution for our wholesale and asphalt businesses, driven by local market demand. In addition, our Altus business benefited from higher location differentials. We see these trends continuing. From a macro standpoint, in the month of July, our benchmark US Gulf Coast tax rate improved by approximately $5 per barrel, which further improved our outlook for the year.
Crude is also a good story for us. We see the heavy-light differential continue to compress which is favorable for our configuration as our system is fully balanced at 95% light with no excess naphtha. In addition, with the growth we see in the Permian production, we expect to be favorable in the Midland differential. Our Logistics segment delivered strong results, which -- with adjusted EBITDA of $91 million this quarter. Our prime acreage is outperforming the Permian Basin. We now forecast around $100 million a quarter from this segment starting in Q4 of this year. Retail also supported a solid quarter. This was driven by higher fuel volume, increased average margin, and higher insights store sales. In closing, our team continued to successfully advance our strategy.
I want to thank each and every team member for their contribution. There is still value to unlock as we continue to execute on our strategic initiative. Now, I would like to turn the call over to Joseph who will provide additional color on our operation.
Joseph Israel: Thank you, Avigal. In the second quarter, our team safely processed 295,000 barrels per day of total throughput. Supported by favorable market conditions in our markets, the Refining system generated $201 million of adjusted EBITDA. In Tyler, throughput in the second quarter was approximately 77,000 barrels per day. Production margin in the quarter was $13.87 per barrel and operating expenses were $3.78 per barrel. In the third quarter, the estimated total throughput in Tyler is in the 74,000 to 78,000 barrels per day range. In El Dorado, total throughput in the quarter was approximately 73,000 barrels per day, and short of our guidance, mainly due to a third-party transformer failure, which led to a power outage related shutdown.
Our production margin was $6.06 per barrel, including an unfavorable impact of approximately $1.50 per barrel due to the power outage. Operating expenses were $5 per barrel. Estimated throughput for the third quarter is in the 76,000 to 80,000 barrels per day range. In Big Spring, total throughput for the quarter was approximately 62,000 barrels per day, approximately 8,000 barrels per day under our guidance, mostly due to unplanned diesel hydrotreater catalyst change and vacuum unit maintenance. Production margin was $11.55 per barrel, including an estimated unfavorable $4.30 per barrel impact from the unplanned events. Operating expenses in Big Spring were $8.91 per barrel, including approximately $0.50 per barrel of the unplanned maintenance activities.
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To support safe and reliable operations in Big Spring, we are investing this year in mechanical integrity and sustaining regulatory items. In the second quarter, approximately $2.30 per barrel of our reported operating expense were related to that important initiative. Our planned cost going forward is approximately $1 per barrel through the third and fourth quarter of this year. The estimated third quarter throughput in Big Spring is in the 64,000 to 70,000 barrels per day range. In Cross Springs, total throughput was approximately 83,000 barrels per day. Our production margin was $6.21 per barrel and operating expenses were $4.74 per barrel. Planned throughput in the third quarter is in the 78,000 to 82,000 barrels per day range. Compared with the first quarter, the system benefited mainly from the improved gasoline crack spreads and reduced RVO cost in the second quarter, while jet fuel and NGL crack spreads provided some evidence.
Strong asphalt and wholesale marketing added $82 million to our second quarter Refining segment earnings. Outside of our reported margins at each of the refineries and their associated capture rates, approximately $30 million of that added value was generated in Krotz Springs, driven by light-cycle oil, high sulfur diesel, and alkylate sales. $14 million were generated by Tyler whole marketing. Approximately $27 million was generated in El Dorado, and close to $11 million in Big Spring, both driven by asphalt and wholesale marketing. Overall, estimated systems throughput in the third quarter is in the 292,000 to 310,000 barrels per day range. We continue to focus on safety, reliability, and environmental compliance as our top priorities, and we expect margin capture and cost performance to follow.
With regards to DKN, as mentioned by Avigal, we are clearly beneficiaries of the strong Permian Basin growth also at the Logistics business level. The Midland Gathering System volumes have more than doubled from a year ago and our team has demonstrated solid operations and growth, which are well reflected in the financial results. I will now turn the call over to Rosy for the financial variance.
Rosy Zuklic: Thanks Joseph. I'll start on slide five of our presentation material. For the second quarter of 2023, Delek US had a net loss of $8 million or $0.13 per share. Adjusted net income was $65 million or $1 per share, and adjusted EBITDA was $259 million. Cash flow from operations was $95 million. On slide six, we provide a waterfall of our adjusted EBITDA by segment from the first quarter to the second quarter of 2023. The decrease was primarily from lower results in Refining, largely reflecting the decrease in crack spreads. The Gulf Coast 532 crack averaged $25.54 for the quarter, down from $32.55 in the first quarter. Strong performance from our wholesale and asphalt businesses as well as draws on inventory at quarter end, partly offset the lower cracks.
Retail improved versus last quarter as crude prices fell, improving pricing at the retail level. In addition, Volumes were higher, consistent with the season. Moving to slide seven to discuss cash flow. We drew $43 million in cash during the quarter, ending the second quarter with $822 million in cash. The $95 million in operating activities includes approximately $80 million of cash outflows for the inventory draws executed late in the quarter. The timing of the inventory draws is the primary reason net debt increased this quarter. We received the cash for these sales in July. Investing activities of $58 million is mainly for capital expenditures. Financing activities of $81 million primarily reflects returns to shareholders. This includes $40 million in buybacks, $15 million in dividends, and $10 million in distribution payments.
On slide eight, we show capital expenditures. Year-to-date, we have spent $253 million. We estimate the full year to remain at approximately $350 million. Net debt is broken out between Delek and Delek Logistics on slide nine. During the quarter, consolidated net debt increased by $79 million. The last slide covers outlook items for the third quarter of 2023. In addition to the throughput guidance, Joseph provided, we expect operating expenses to be between $210 million and $220 million. This includes $10 million to $15 million related to the mechanical integrity work at the Big Spring refinery. G&A to be between $65 million and $70 million. D&A to be between $85 million and $90 million, and we expect net interest expense to be between $80 million $85 million.
Before we open the line for question, a comment on our cost initiative efforts. Second quarter G&A as reflected on the income statement is $7.8 million. This includes $4.3 million of restructuring costs. Excluding this one-time expense, adjusted G&A for second quarter was in line with the first quarter of 2023. As provided in the guidance, we expect third quarter D&A to be lower in the range of $65 million to $70 million and now expect fourth quarter 2023 to be approximately $65 million. We are on track to meet our annual run rate cost savings of $90 million to $100 million as we exit 2024. We will now open the line for questions.
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