Delek US Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Delek is an integrated downstream energy company with refining, logistics and retail operations. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Net revenue | $2,392.2 | $1,821.2 |
| Operating loss | $80.1 | $361.5 |
| Net loss attributable to Delek | $98.6; $1.34 loss per diluted share | $314.4; $4.28 loss per diluted share |
| Operating cash flow | $(34.3) | $(154.1) |
| Investing cash flow | $(46.1) | $(146.6) |
| Capital spending | $67.0 | $190.2 |
| Cash and cash equivalents | $793.5 | $787.5 at Dec. 31, 2020 |
| Debt carrying amount | $2,367.8 | $2,348.4 at Dec. 31, 2020 |
| Liquidity | Approximately $1.5 billion, including cash and $747.9 of unused revolving credit availability | — |
Current assets exceeded current liabilities by approximately $405 million at March 31, 2021. The company also reported $410.7 million of obligations under supply-and-offtake agreements, including $287.1 million classified as non-current. Cash increased $6.0 million during the quarter.
Segment contribution margin: Refining was $(21.2), compared with $(290.4) in Q1 2020; Logistics was $57.7, versus $47.3; Retail was $16.9, versus $12.3. Consolidated segment contribution margin was $37.4, compared with $(243.9). Refining margin, a non-GAAP measure, was $92.4, compared with $(178.7).
Changes versus the prior-year quarter
- Revenue rose 31.4%, while the attributable net loss narrowed substantially. The improvement in refining results was helped by stronger benchmark crack spreads and a $20.4 million benefit from inventory valuation changes, versus a $280.8 million charge in Q1 2020.
- Higher crude and product prices lifted revenue and input costs. Delek reported lower hedging results: a $57.4 million loss in Q1 2021 versus a $77.9 million gain in Q1 2020.
- Refinery sales volumes were affected by Winter Storm Uri, turnaround work and the temporary suspension of crude-processing production at Krotz Springs. Big Spring volumes increased compared with its prior-year turnaround period.
- Retail fuel gallons sold declined to 39.8 million from 48.0 million, with same-store fuel gallons down 17.0%; merchandise sales increased 4.2% on a same-store basis.
- Operating cash use declined from the prior year, and investing cash use was lower, mainly reflecting reduced capital spending. Cash interest paid was reported at $142.1 million versus $32.2 million; this differs substantially from reported interest expense and merits review of the filing’s cash-flow and debt disclosures.
Outlook, commentary and notable risks
- The filing gives no formal earnings or margin guidance. Management forecast full-year 2021 capital spending of $180.2 million, excluding potentially additional costs from Winter Storm Uri and the El Dorado fire that were not yet determinable.
- Management described domestic recovery trends, including increased driving and resumed airline activity, but said refined-product demand had not returned to normal. COVID-19 duration, variants, travel recovery, commodity prices and crack spreads remain uncertain.
- Winter Storm Uri temporarily affected all refineries, disrupting crude supply and damaging units; higher regional energy costs also increased operating expense. At El Dorado, a February 27 fire injured six employees. The company recorded $3.8 million of workers’ compensation losses and $1.0 million of accelerated depreciation; the full loss and potential insurance recovery were undetermined. Property coverage has a $5.0 million deductible.
- RIN-related environmental credit deficit was $220.8 million at quarter-end, up from $59.6 million at year-end. Delek cautioned that RIN prices are volatile and may adversely affect results if costs cannot be passed through. Management also identified possible future RIN inventory adjustments; exposure was not determinable but was not expected to be material relative to the total RIN obligation.
- Environmental liabilities totaled approximately $112.1 million; about $5.1 million was expected to be spent over the next 12 months, with most of the balance expected by 2032. Additional investigation or remediation could increase the obligation.
- Delek had approximately $314.6 million of letters of credit outstanding and reported compliance with debt covenants at March 31, 2021. Floating-rate borrowings were approximately $2.10 billion; management estimated a one-percentage-point rate change would change annual interest expense by about $21 million.
- Dividends remained suspended, as did the share repurchase program. Management cited capital conservation and cost reduction measures. In May 2021, after quarter-end, Delek Logistics entered a five-year chemical supply agreement with a five-year extension option.
- An April 2021 Delaware lawsuit by CVR Energy sought access to company books and records. Delek said it did not expect pending proceedings to materially adversely affect its financial statements. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- How much of the year-over-year earnings improvement reflects sustainable operating performance versus the large inventory valuation comparison and derivative results?
- What were the full operational, repair and insurance-recovery effects of Winter Storm Uri and the El Dorado fire?
- How will fuel-demand recovery, refinery utilization, crack spreads and crude differentials affect refining and retail performance?
- What are the timing, cash requirements and potential volatility associated with the $220.8 million RIN deficit, $410.7 million supply-and-offtake obligations and environmental liabilities?
- Reconcile the reported $142.1 million of cash interest paid with $29.6 million of interest expense, and confirm debt principal, availability and covenant headroom across Delek and Delek Logistics facilities.