Delek US Holdings, Inc. (NYSE: DK) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial figures are in millions unless otherwise noted. Delek operates refining, logistics and retail businesses.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $4,748.4 | $5,324.9 | $12,868.3 | $15,766.6 |
| Operating income | $224.7 | $53.0 | $417.6 | $593.0 |
| Net income attributable to Delek | $128.7 | $7.4 | $184.7 | $375.8 |
| Diluted earnings per share | $1.97 | $0.10 | $2.78 | $5.21 |
| EBITDA attributable to Delek (non-GAAP) | $333.8 | $135.0 | $731.5 | $825.2 |
Margins and segments: Refining margin was $456.7 million in Q3, up from $253.7 million, while nine-month refining margin declined to $1,061.6 million from $1,234.2 million. Q3 refining EBITDA rose to $285.1 million from $90.3 million; nine-month refining EBITDA fell to $587.7 million from $758.2 million. Logistics EBITDA increased to $96.5 million in Q3 and $278.8 million year to date, with the year-to-date improvement including Delaware Gathering. Retail EBITDA was $16.2 million in Q3 and $37.6 million year to date.
Cash flow and liquidity: Nine-month operating cash flow was $922.8 million, versus $716.1 million; investing cash outflow was $338.6 million, versus $819.9 million; financing cash outflow was $523.8 million, compared with $401.1 million of inflow. Cash rose to $901.7 million from $841.3 million at year-end 2022. The company reported total liquidity of approximately $1.8 billion, comprising cash and $906.9 million of available revolving credit commitments. Cash purchases of property, plant and equipment were $338.3 million; reported segment capital spending was $301.6 million.
Debt and obligations: Debt principal was $2,698.1 million ($2,638.0 million net of unamortized discount and financing costs), down about $422.4 million from December 31, 2022. The $502.2 million Inventory Intermediation Agreement obligation was reported separately from debt. Delek Logistics’ revolving facility was heavily drawn: $811.2 million outstanding and $88.8 million available at quarter-end. Delek said it was in compliance with debt covenants.
Changes versus comparable periods
- Q3 revenue fell 10.8% and nine-month revenue fell 18.4%, principally reflecting lower refined-product prices and reduced wholesale activity; lower crude and product costs also reduced reported costs.
- Q3 earnings improved sharply, supported by stronger refining margin, higher utilization, favorable inventory effects and lower natural-gas costs. Nine-month earnings and EBITDA declined, mainly reflecting lower refining margin and crack spreads, alongside higher interest expense.
- Interest expense rose to $82.3 million in Q3 from $50.7 million and to $239.2 million for nine months from $132.7 million. Management attributed the increase to higher effective interest rates and, year to date, higher average borrowings and related obligations.
- Q3 refining utilization was 97.6%, versus 99.3% a year earlier. Refinery throughput averaged 305,948 barrels per day, compared with 302,249.
Outlook, commentary and notable items
- Management described near-term economic conditions as uncertain, but expected constrained crude and refined-product supply to support continued strong downstream refining conditions. It also cited robust demand and a focus on safe, reliable operations and cost efficiency.
- Management targeted $100 million in run-rate cost reductions in 2024 through its zero-based budgeting initiative. Expected 2023 capital expenditures were $380–390 million; management also expected about $20 million of insurance and other proceeds, not included in that forecast.
- The board declared a quarterly dividend of $0.24 per share on November 1, 2023. Delek repurchased $65.4 million of shares in the first nine months and approximately $20.0 million after quarter-end; $205.1 million of repurchase authorization remained at September 30.
- Commodity and valuation effects were significant: Delek reported Q3 losses of $97.1 million on non-trading commodity derivatives and a loss of $83.5 million from changes in the Inventory Intermediation Agreement’s fair value due to commodity prices. The filing reports the latter nine-month loss as $44.5 million; investors may wish to review the supporting disclosures.
- Environmental liabilities were approximately $114.7 million, with about $3.1 million expected to be spent within 12 months. The filing also describes ongoing environmental, regulatory and RIN compliance exposure. Management said pending legal proceedings were not expected to have a material adverse effect.
- Delek recorded an additional $8.0 million expense in 2023 for uncovered claims associated with the 2021 El Dorado refinery fire. In October 2023, it reached a settlement with six injured employees; the stated net impact after insurance is approximately $10.0 million. The accrued current liability identified as the El Dorado refinery fire settlement was $177.5 million at September 30.
- On November 6, 2023, Delek Logistics amended its credit facilities, including increasing revolving commitments by $150 million and extending its term-loan maturity to April 15, 2025, subject to stated acceleration provisions. These are post-quarter-end developments.
Important facts for investors to verify
- How much of the Q3 earnings improvement reflects durable operating performance versus inventory, hedging and other market-sensitive effects.
- The drivers and expected cash impact of higher interest expense, floating-rate debt and Delek Logistics’ substantial revolving borrowings, including the 2025-note-linked maturity provisions.
- The basis and timing of the El Dorado fire settlement accrual, insurance recoveries and remaining claims, as well as the environmental liability estimates.
- Progress toward the $100 million 2024 cost-reduction target, the full-year capital-spending forecast and management’s stated market outlook.
- Cash requirements and refinancing exposure under the Inventory Intermediation Agreement, product-financing arrangements and other contractual obligations.