Delek Logistics Partners (DKL) 6 Aug 24 2024 Q2 Earnings call transcript

Delek Logistics Partners (DKL) has reported a record quarter with an adjusted EBITDA of $102.4 million, marking a significant milestone in the company's growth trajectory. The strong performance was underpinned by strategic moves, including the amendment and extension of a contract with DK and the acquisition of H2O Midstream, further solidifying DKL's position as a premier full-service crude water and natural gas provider in the Permian Basin.

Contract Extension and Wink to Webster Pipeline

A notable achievement was the amendment and extension of the contract between DKL and DK, removing an overhang on the DKL unit and extending the contract terms to up to 7 years. This move not only enhances DKL's asset quality and strengthens its position in the Permian Basin but also enables the acquisition of DK's interest in the Wink to Webster pipeline without significant strain on the balance sheet. With a focus on prudent management of liquidity and leverage, DKL is successfully navigating growth with a well-managed balance sheet.

Investment in New Gas Processing Plant

Another significant announcement was the investment in a new gas processing plant, which is estimated to generate cash on cash returns of more than 20% upon completion during the first half of 2025. This strategic investment aligns with DKL's goal of expanding its capabilities to be a comprehensive provider of midstream services in the Permian Basin and will contribute significantly to DKL's EBITDA and free cash flow.

Acquisition of H2O Midstream

The acquisition of H2O Midstream for $160 million of cash and $70 million preferred is a testament to DKL's growth strategy. The transaction is immediately accretive to DKL on an EBITDA and free cash flow basis, and the acquired asset fits seamlessly within DKL's existing footprint. This acquisition will not only expand DKL's capabilities but also provide operational efficiencies and synergies, making DKL a mostly independent midstream company.

Outlook and Financial Performance

Financially, DKL's second quarter adjusted EBITDA stood at $102.4 million, a notable increase from the previous year. The distributable cash flow was $68 million, with a DCF coverage ratio of 1.32x, signaling a healthy financial position. The capital program for the second quarter of 2024 was $10.2 million, primarily focused on advancing new connections in the Midland and Delaware gathering system. With the announcement of a new gas processing plant and the acquisition of H2O Midstream, DKL is poised for continued growth and value creation for its unitholders.

Investor Confidence and Future Prospects

The earnings call was marked by investor confidence, with questions centered around the strategic acquisitions, synergies, and future growth prospects. DKL's leadership provided insightful responses, reiterating the company's commitment to delivering value to its unitholders and its strategic focus on expanding its midstream services in the Permian Basin. The Board of Directors' approval of an increase in the quarterly distribution to $1.09 per unit further underscores investor confidence in DKL's growth trajectory.

Conclusion

Delek Logistics Partners' record quarterly adjusted EBITDA of $102.4 million, coupled with strategic acquisitions and investments, positions the company for continued growth and success in the midstream services sector. The acquisitions of H2O Midstream and the new gas processing plant, along with the amended contract with DK, highlight DKL's strategic focus on expanding its capabilities and enhancing its position in the Permian Basin. With a strong financial position and a strategic growth plan, DKL is well-positioned for future success.