Delek US Holdings, Inc. — Q3 2019 Form 10-Q
Period: Quarter and nine months ended September 30, 2019. Delek is an integrated downstream energy company with refining, logistics and retail operations. Financial statements are unaudited; amounts are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,334.3 million | $2,768.9 million | $7,014.5 million | $7,759.0 million |
| Operating income | $87.4 million | $255.2 million | $444.1 million | $429.1 million |
| Net income attributable to Delek | $51.3 million | $179.8 million | $277.9 million | $218.5 million |
| Diluted EPS | $0.68 | $2.03 | $3.60 | $2.50 |
- Q3 refining contribution margin fell to $127.5 million from $319.5 million; logistics rose to $46.6 million from $43.1 million, and retail rose to $18.6 million from $15.3 million.
- For the first nine months, refining contribution margin was $600.1 million versus $629.8 million; logistics was $130.9 million versus $124.8 million; retail was $46.4 million versus $45.8 million.
- Operating cash flow was $448.4 million for the first nine months, versus $201.2 million. Investing cash outflow was $509.5 million; financing cash outflow was $11.8 million. Cash declined $72.9 million to $1,006.4 million.
- Cash capital expenditures were $305.7 million; reported capital spending, including accrued amounts, was $324.8 million. Full-year 2019 capital-spending forecast was $414.9 million.
- At September 30, total debt and notes payable were $1,999.9 million. Revolving-facility availability was approximately $800.2 million before considering the separately reported $293.5 million of letters of credit. The company reported covenant compliance.
- Current assets were $2,864.4 million and current liabilities were $2,226.7 million. Operating lease liabilities totaled $189.3 million, recognized following adoption of the lease standard in 2019.
Material changes and management commentary
- Q3 revenue decreased 15.7%, while operating income and attributable net income fell sharply year over year. Management attributed lower refining results to narrower crude differentials, lower refined-product prices and volumes, and an El Dorado refinery vacuum-unit outage. Q3 refining margin declined 43.4% to $248.2 million.
- For the nine months, revenue fell 9.6%, but operating income and attributable net income increased. Management cited higher equity-method investment income, stronger hedging results, lower feedstock and RIN costs, and the absence of certain 2018 charges; these benefits were partly offset by weaker refining contribution and lower prior-year RIN-waiver and biodiesel-tax-credit benefits.
- Management said cash from operations, borrowing capacity and other sources were expected to meet operating and capital needs for at least the next 12 months. The filing provides no specific earnings or operating guidance.
- Delek invested in pipeline joint ventures: it acquired a 15% interest in Wink to Webster, with expected total contributions of $340–$380 million over an anticipated two-to-three-year construction period; it also contributed $124.7 million for a 33% Red River Pipeline interest, plus $3.5 million toward expansion. Subsequent to quarter-end, it contributed another $46.2 million to Wink to Webster.
- The Krotz Springs alkylation project was completed in April at a cost of approximately $138 million. Management expects added conversion flexibility and less dependence on crack-spread conditions over time.
- Delek repurchased 4.18 million shares for $147.8 million in the first nine months; $261.9 million remained under the $500 million authorization. The board declared a $0.30-per-share dividend in November, payable December 2, 2019.
Risks, contingencies and unusual items
- Refining earnings remain exposed to crude and product prices, crack spreads and crude differentials, refinery reliability and turnarounds, and volatile RIN costs. A $20.7 million benefit from 2018 small-refinery RIN waivers was recognized in 2019; inventory valuation changes also affected cost of sales.
- Floating-rate borrowings were approximately $1,694.5 million. Management estimated that a 1 percentage-point rate change would alter annual interest expense by about $16.9 million.
- Environmental liabilities were approximately $142.8 million, with most expected remediation spending extending through 2032. The Big Spring refinery consent decree may require significant pollution-control capital spending over the next 10 years.
- A pipeline release near Sulphur Springs, Texas, occurred October 3, after quarter-end. Delek estimated cleanup and remediation costs of $4–$6 million, excluding any fines or penalties, which it could not estimate; no accrual was recorded at September 30.
- A court assessed $6.7 million of damages in an easement dispute, recorded in current liabilities. Delek stated it did not believe currently pending proceedings would materially adversely affect its financial statements.
- The filing notes that 2018 comparative revenue and cost-of-materials figures include a correction to intercompany eliminations, with no effect on operating income or net income. Certain 2018 tax figures also reflect a previously reported correction.
Important facts for investors to verify
- Whether refining margins and throughput recover from Q3 pressure, particularly at El Dorado, and how crude differentials and crack spreads evolve.
- Actual cash requirements and funding for Wink to Webster, Red River expansion and the remaining 2019 capital program.
- Debt, borrowing-base availability, letters of credit and interest-rate exposure, including any changes after quarter-end.
- Final costs, penalties or insurance recoveries related to the Sulphur Springs release and progress on environmental obligations and the Big Spring consent decree.
- Whether RIN-waiver benefits, inventory valuation changes and derivative results are recurring; the filing does not provide a specific forward earnings outlook.