U.S. Markets open in 6 hrs 1 min

Edited Transcript of DKL earnings conference call or presentation 5-Aug-19 12:30pm GMT

Q2 2019 Delek Logistics Partners LP Earnings Call

Brentwood Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Delek Logistics Partners LP earnings conference call or presentation Monday, August 5, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Assaf Ginzburg

Delek Logistics Partners, LP - Executive VP, CFO & Director of Delek Logistics GP, LLC

* Blake Michael Fernandez

Delek US Holdings, Inc. - SVP of IR and Market Intelligence

* Ezra Uzi Yemin

Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP LLC

* Keith Johnson

Delek Logistics Partners, LP - VP of IR of Delek Logistics GP, LLC

================================================================================

Conference Call Participants

================================================================================

* Justin Scott Jenkins

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Ned Antonov Baramov

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day. My name is Jay, and I will be your conference operator for today. At this time, I would like to welcome everyone to Delek's Second Quarter Earnings Call.

(Operator Instructions) It is now my pleasure to turn this program over to Mr. Keith Johnson. Sir, the floor is yours.

--------------------------------------------------------------------------------

Keith Johnson, Delek Logistics Partners, LP - VP of IR of Delek Logistics GP, LLC [2]

--------------------------------------------------------------------------------

Thank you, Jay. Good morning. I would like to thank everyone for joining us on this webcast to discuss DKL's second quarter 2019 financial results.

Joining me on today's call will be Uzi Yemin, our general partner's Chairman and CEO; Assi Ginzburg, CFO; Blake Fernandez, SVP of Investor Relation; as well as other members of our management team.

As a reminder, this conference call may contain forward-looking statements and that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words, believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release.

As a result, actual operations or results may differ materially from results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition to reporting financial results in accordance with generally accepted accounting principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of our website.

On today's call, Assi will begin with a financial overview, and Blake will review the results, then Uzi will offer a few closing strategic remarks. With that, I'll turn the call over to Assi.

--------------------------------------------------------------------------------

Assaf Ginzburg, Delek Logistics Partners, LP - Executive VP, CFO & Director of Delek Logistics GP, LLC [3]

--------------------------------------------------------------------------------

Thank you. Our second quarter performance benefited from contribution from our acquisition completed in May and improved results from our Paline Pipeline.

Our DCF was approximately $31.2 million in the second quarter 2019 compared to $33.5 million in the second quarter of 2018. Our DCF coverage was 1.08x for the second quarter 2019 compared to 1.34x in the prior year period. EBITDA was $45 million, which is similar to the prior year period.

Based on our performance, we increased our quarterly distribution to $0.85 per limited partner unit for the second quarter ended June 30, 2019. This distribution would be paid on August 13, 2019, and is a 3.7% increase from our first quarter 2019 distribution per unit. This is our 26th consecutive quarterly increase and is 10.4% higher than our second quarter 2018 distribution per unit.

As of June 30, 2019, DKL had approximately $253 million of available capacity on our $850 million credit facility. Our total debt was approximately $841 million, and the total leverage ratio of 4.6x is within the 5.25x currently allowable under our credit facility.

Now I will turn the call over to Blake to discuss the results.

--------------------------------------------------------------------------------

Blake Michael Fernandez, Delek US Holdings, Inc. - SVP of IR and Market Intelligence [4]

--------------------------------------------------------------------------------

Thanks, Assi. For the second quarter of 2019, Delek Logistics reported net income attributable to all partners of $24.9 million, which compares to $25.6 million in the prior year period.

Interest net income was $16.8 million or $0.69 per unit compared to $19.4 million or $0.79 per unit in the prior year period. I do want to note, lower throughput on our assets, which was related to the turnaround of El Dorado refinery, reduced our performance in the second quarter of 2019 by approximately $800,000 on a year-over-year basis.

In our Pipelines and Transportation segment, the second quarter of 2019 contribution margin was $24.1 million compared to $22.6 million in the second quarter of 2018. This increase was primarily attributable to improved performance from the Paline Pipeline, which was partially offset by lower throughput to the Lion Oil Pipeline system due to reduced operating rates at El Dorado. The Paline Pipeline benefited from a higher tariff after the incentive rate expired at the end of February of 2019.

Operating expenses increased to $12.7 million in the second quarter from $9.9 million in the prior year period, primarily due to outside services and employee expenses.

The Wholesale Marketing and Terminalling segment, the contribution margin was $20 million in the second quarter of this year, which was a decrease of $22.7 million in the prior year period. This decrease was due to lower West Texas gross margin, partially offset by lower operating expenses.

Our West Texas wholesale gross margin was $6.25 a barrel in the second quarter of 2019 compared to $8.06 per barrel in the second quarter of the prior year. Throughput in the West Texas was 11,404 barrels per day compared to 12,261 barrels per day in the prior year.

During July, the gross margin in West Texas averaged $7.80 per barrel, and volumes averaged approximately 9,300 barrels per day.

During the second quarter of 2019, our equity income from joint venture crude oil pipelines was approximately $4.5 million compared to income of $1.9 million in the prior year period.

Capital expenditures were approximately $1.3 million in the second quarter of 2019, included $222,000 discretionary spending and $1.1 million of maintenance. During the second quarter of 2019, approximately $684,000 was reimbursed by Delek US. In the second quarter of 2018, total capital expenditures were $2.3 million.

For the full year of 2019, our gross capital expenditure forecast is $8.8 million, which includes $800,000 of discretionary and $8 million of maintenance capital before reimbursement by Delek US. We expect approximately $2.3 million of maintenance capital expenditures to be reimbursed in 2019.

With that, I will turn the call over to Uzi for his closing comments.

--------------------------------------------------------------------------------

Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP LLC [5]

--------------------------------------------------------------------------------

Thanks, Blake, and welcome to the team.

The Red River transaction provided an immediate contribution to DKL with 2 months of ownership in the quarter and is running at the high end of our focus. The asset is performing well, and we expect increased contributions upon completion of the extension in the first half of next year. With Red River in the portfolio, it provides the next step in our growth. This potentially allows drop-down from DK to be deferred for the time being. Our focus is using our cash flow for organic growth opportunities, deleveraging the balance sheet and supporting our coverage. As DKL continues to grow, we will evaluate auction to simplify the IDRs.

With continued growth at DKL, this should support our annual distribution growth per limited partner unit of at least 10% through 2019 while maintaining appropriate annual distribution coverage.

With that, Jay, could you please open the call for questions?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Spiro Dounis of Crédit Suisse.

--------------------------------------------------------------------------------

Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [2]

--------------------------------------------------------------------------------

Uzi, maybe if we just start off on the last comments there around deferring drop-downs potentially in assessing IDRs. I think the guidance provided maybe earlier in the year was to expect something in the second half specifically around both of those events, but I don't want to read too much into your comments, but it sounds like maybe that's been updated now, and we shouldn't really be expecting it here in the second half of the year. Is that fair?

--------------------------------------------------------------------------------

Assaf Ginzburg, Delek Logistics Partners, LP - Executive VP, CFO & Director of Delek Logistics GP, LLC [3]

--------------------------------------------------------------------------------

Firstly, good morning, and thank you for the question. This is Assi. Right now, as you saw, we have done a very good job with completing the Red River transaction, which would enable us, for this year and next year, to report very good result and achieve a very high coverage. At this point, during the drop-down, it will impact actually potentially negative the coverage, and the same thing would be with the IDR simplification. So what we decided to do at this point is to build coverage and reduce leverage while investing in a long -- in project that basically create a lot of EBITDA that we are discussing today. And then over time, we'll assess the need to do the IDR simplification, but we definitely want to address it at one point.

--------------------------------------------------------------------------------

Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [4]

--------------------------------------------------------------------------------

Got it. That's clear. Appreciate the color there. Second one just around Wink to Webster and thinking about potential the read-throughs for DKL eventually. Just on the 15% return, can you maybe provide a little bit more color around how you're achieving that? Is that sort of on an levered basis? I think 75% LTV was mentioned. And then secondly, just ahead of any potential drop-down in the asset later on, should we expect an uplift on the gathering system that you guys own now, upstream of that pipeline?

--------------------------------------------------------------------------------

Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP LLC [5]

--------------------------------------------------------------------------------

These are great questions, and we can be clear on all of them. First, as DKL reported today, DK continues to increase the amount of dedicated acreage that the company has. Obviously, that comes with a substantial amount of EBITDA. As the system matures and more and more are barrels are coming to the system, there is a need for us to push these barrels outside that system because we have more barrels than there are refining systems. That made the decision for DK to join the WTW project. We've mentioned that we are well above our 15% threshold.

The 15%, it is our leverage. We always said that we are targeting 5 to 7x EBITDA unleveraged, and we feel that this is a very good project. Also there is another undisclosed partner in this partnership. When they decide to disclose themselves, the numbers will be even clearer. So we feel good about that situation.

DK mentioned the 75% -- or at least 75% leveraging. That is either through project finance or our other means, and we will look into that. All this will find itself eventually into the logistics arm, so we feel really good about our ability to get to the $375 million to $395 million EBITDA by 2023.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Justin Jenkins of Raymond James.

--------------------------------------------------------------------------------

Justin Scott Jenkins, Raymond James & Associates, Inc., Research Division - Senior Research Associate [7]

--------------------------------------------------------------------------------

Uzi, I guess, on the topic here of organic growth, it seems like that's the emphasis here, and we're going to get some of that from Red River expansion, but maybe can you expand on that the potential for growth related to Paline Pipeline and if that can be further expanded?

--------------------------------------------------------------------------------

Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP LLC [8]

--------------------------------------------------------------------------------

Absolutely. That's a great question. We will -- still evaluating that, but with the Red River coming down and more barrels finding themselves into Longview, we spoke about Longview for a long time, one of the reasons, we say to ourselves that our growth income from organic projects is the Paline expansion. We are still doing the engineering, but it looks like a very good return for our company. And don't be surprised if we announce something in the next couple of months about Paline in particular and also around Longview in general.

--------------------------------------------------------------------------------

Justin Scott Jenkins, Raymond James & Associates, Inc., Research Division - Senior Research Associate [9]

--------------------------------------------------------------------------------

Got it. And a follow-up question is more on the IDRs and the targets here in terms of leverage. Is -- Assi, is there any kind of numbers there that you can float out there for us in terms of what you're looking for coverage ratio or leverage target before you start to address some of the longer-term concerns?

--------------------------------------------------------------------------------

Assaf Ginzburg, Delek Logistics Partners, LP - Executive VP, CFO & Director of Delek Logistics GP, LLC [10]

--------------------------------------------------------------------------------

Sure. So from a leverage perspective, we're always comfortable around 4. And we always said that for a great acquisition, we're ready to leverage up a little bit. And this is exactly what we did with Red River. As you know, we leveraged up to 4.65x. With that being said, after the end of the construction, and we think that this pipeline eventually will be full, this would enable us very quickly to go below 4.25x.

On the coverage perspective, as you all know, the decision to make the IDR simplification, it's a negotiation between DK and DKL, and we want to make sure that it will be fair for everybody. In order to do that, we probably will need to get to a coverage of 1.2x that will allow us to really quickly do the IDR simplification and to continue and preserve our coverage. So this is basically our goal for the next -- to get over the next year, 1.5 years.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Ned Baramov of Wells Fargo.

--------------------------------------------------------------------------------

Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [12]

--------------------------------------------------------------------------------

A follow-up on Paline, if I may. So will the planned expansion be timed to match the in-service of the expansion of Red River?

--------------------------------------------------------------------------------

Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP LLC [13]

--------------------------------------------------------------------------------

The time to do the Paline project is over the next 2, 3 quarters, maybe 4 quarters. So it may match. We just need to evaluate the asset. And yes, we'd like to come with numbers before we announce that project. We're doing the engineering as we speak, and I wouldn't be surprised if it will be all to -- if everything will come together at the same time.

--------------------------------------------------------------------------------

Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [14]

--------------------------------------------------------------------------------

Got you. And then a question on the West Texas margin. It seems there was another strong quarter with $6.25 per barrel versus what I think we've discussed in the past in terms of the normalized level in the range of $1.50 to $2.50. Could you maybe talk about DKL's ability to maintain these higher margins going forward?

--------------------------------------------------------------------------------

Assaf Ginzburg, Delek Logistics Partners, LP - Executive VP, CFO & Director of Delek Logistics GP, LLC [15]

--------------------------------------------------------------------------------

Well, $2.50 is -- I don't think ever was much in the card with the way they are valued the way they are because just shipping from the Gulf today on Magellan is a $0.085 to $0.09. So this is without terminalling or anything like that. So if you take that, just the floor is without $3.50 or $4.

Now, obviously, the market is very strong. We see a tremendous amount of drilling. So we -- I think Blake mentioned that in July, we saw $7.80. So for the rest of the year, we -- unless some drilling will fall off the cliff, we should continue to see good margins.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further question at this time. Presenters, you may proceed.

--------------------------------------------------------------------------------

Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP LLC [17]

--------------------------------------------------------------------------------

Thanks, Jay. Well, I'd like to thank everybody around the table. Specifically, I'd like to welcome again Blake. Great addition to the team. I'd like to thank my colleague around the table and to the management team for the hard work that they are putting together.

I'd like to thank the Board of Directors for the trust they put in us, obviously, you investors for all these years. And mainly, I'd like to thank each one of this -- the employees of this great company, who made this company what it is. Have a great day. We'll talk to you in the future.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Thank you again for joining us today. This concludes today's conference call. You may now disconnect. Have a great day.