Delek US Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited. Delek operates refining, logistics and retail businesses; it reported four refineries with combined nameplate capacity of 302,000 barrels per day and owned 78.7% of Delek Logistics.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net revenue | $3,924.3 million | $4,459.1 million |
| Operating income | $142.8 million | $46.7 million |
| Net income attributable to Delek | $64.3 million; $0.96 basic EPS | $6.6 million; $0.09 basic EPS |
| EBITDA attributable to Delek (non-GAAP) | $240.0 million | $116.4 million |
| Net cash from operating activities | $395.1 million | $26.8 million |
| Capital spending | $192.1 million | $32.9 million |
| Cash and cash equivalents at quarter-end | $865.0 million | $841.3 million at Dec. 31, 2022 |
| Debt, net of discount and financing costs | $2,775.0 million | $3,053.7 million at Dec. 31, 2022 |
Quarter-end liquidity was reported at approximately $1.7 billion, comprising $865.0 million cash and $865.8 million of unused revolving credit commitments. Delek also had $536.2 million of inventory-intermediation obligations and $362.1 million of product-financing liabilities, the latter due within 12 months. The company paid $105.7 million of interest in cash during the quarter.
Refining margin, a non-GAAP measure, increased to $335.7 million from $202.1 million; margin as a percentage of refining-segment revenue was 8.8%, versus 4.6%. Segment EBITDA was $192.1 million for Refining, $91.4 million for Logistics, $6.4 million for Retail and negative $49.9 million for Corporate, Other and Eliminations.
Changes versus the prior-year quarter
- Revenue declined 12.0%, primarily reflecting lower refined-product prices and sales volumes, including reduced Tyler refinery output during its turnaround. Cost of materials fell 17.2%, supporting higher operating income and earnings.
- Refining EBITDA rose by $112.1 million, mainly on improved crack spreads and lower natural-gas and RIN costs, partly offset by Tyler turnaround-related volume reductions and higher operating costs.
- Logistics EBITDA increased by $27.2 million, benefiting from the Delaware Gathering acquisition and higher Midland Gathering volumes. The acquisition contributed $44.3 million of revenue and $11.5 million of net income in Q1 2023.
- Retail EBITDA decreased to $6.4 million from $10.3 million, reflecting lower fuel margin per gallon and higher employee costs; merchandise sales increased 5.3% on a same-store basis.
- Net operating cash flow improved substantially, aided by operating results and working-capital movements. Cash capital spending rose, largely due to the Tyler turnaround and refinery and logistics projects.
- Net debt decreased approximately $281 million during the quarter. Interest expense nevertheless nearly doubled year over year, to $76.5 million, due to higher average borrowing rates and borrowings.
Outlook, commentary and risks
Management gave no specific quantitative earnings or operating guidance in the provided filing text. It expected a return to near-full utilization for the remainder of 2023 after the Tyler turnaround, with no other significant planned downtime until late 2024. Management described refining margins and product demand as strong, citing constrained supply, export demand and favorable crude differentials; it expected seasonal gasoline and diesel demand and continued support for refinery utilization. The full-year 2023 capital-spending forecast was $350.5 million.
Management’s priorities include safe and reliable operations, debt reduction, shareholder returns, cost discipline, retail rebranding and evaluating growth or diversification opportunities, including alternative energy. A safety action plan is expected to require previously unbudgeted capital spending, labor and specialist resources. The company declared a $0.23-per-share dividend after quarter-end and disclosed subsequent repurchases of approximately $40 million of stock.
- Results remain sensitive to refining margins, crude and product prices and differentials, refinery reliability and downtime, natural-gas costs, RIN prices, and derivative volatility. Management noted that labor and supply-chain cost pressures were expected to continue through 2023.
- Floating-rate borrowings totaled approximately $2.19 billion; a hypothetical 1 percentage-point rate increase would raise annualized interest expense by approximately $21.9 million.
- Environmental liabilities were approximately $114.6 million, including a $78.5 million liability associated with a former asphalt and marine-fuel terminal property. Environmental compliance, remediation and evolving regulation may require additional spending or liabilities.
- Insurance recovery work remains ongoing for prior fires at the El Dorado and Big Spring refineries and Winter Storm Uri. The filing does not quantify potential future recoveries. The company recognized a $5.1 million gain for Uri-related claims in Q1 2023.
- Delek reported compliance with debt covenants at March 31, 2023. Its United Community Bank revolver matured June 30, 2023, and the Delek Logistics term loan matures October 2024.
Other notable comparability item: the prior-year quarter included $148.8 million of gains from fair-value changes in the former J. Aron supply-and-offtake arrangement; the current Citi inventory-intermediation arrangement generated $12.7 million of such gains in Q1 2023. The arrangements and associated accounting affect period-to-period comparisons.
Important facts for investors to verify
- Whether refinery utilization and refining margins recover as management expected after the Tyler turnaround, and whether any unplanned outages arise.
- Debt repayment progress, borrowing rates, near-term maturities and the availability of revolving credit; assess liquidity alongside inventory-intermediation and product-financing obligations.
- Whether forecast capital spending, including safety-plan costs, remains within budget and how it affects cash generation and returns to shareholders.
- RIN obligations, environmental liabilities and potential remediation or regulatory costs, as well as the status and collectability of insurance claims.
- How much earnings growth from Delaware Gathering is sustained, and how future segment results compare after considering the acquisition and prior-period fair-value gains.