Delek US Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. Delek is an integrated downstream energy company with refining, logistics and retail segments.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $5,324.9 million | $2,956.5 million | $15,766.6 million | $7,540.2 million |
| Operating income (loss) | $53.0 million | $37.9 million | $593.0 million | $(59.7) million |
| Net income (loss) | $16.8 million | $20.6 million | $400.2 million | $(90.2) million |
| Net income (loss) attributable to Delek | $7.4 million | $11.8 million | $375.8 million | $(114.9) million |
| Basic EPS | $0.11 | $0.16 | $5.26 | $(1.55) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $716.1 million | $210.2 million |
Margins: Refining segment contribution margin was $106.0 million in Q3, up from $82.1 million; for the nine months it was $821.2 million, compared with $106.6 million. These are segment measures, not consolidated net margins. Q3 refining segment margin was $278.0 million, compared with $166.3 million.
Cash, debt and liquidity at September 30: Cash and equivalents were $1,153.8 million. Reported debt and notes payable were $2,733.6 million, net of discounts and financing costs. Total liquidity was approximately $2.1 billion, including cash and unused commitments of $787.4 million at Delek and $193.1 million at Delek Logistics. Current liabilities were $3,829.3 million. The J. Aron supply-and-offtake obligation was $596.2 million, and product financing liabilities were $305.7 million.
Material changes versus the prior comparable period
- Q3 revenue rose 80.1%, primarily reflecting higher refined-product prices and logistics and retail sales prices. Delek-attributable earnings nevertheless declined to $7.4 million from $11.8 million.
- For the first nine months, revenue more than doubled and Delek moved from a $114.9 million attributable loss to $375.8 million of attributable income. Higher refining margins, sales volumes and operating performance contributed; 2021 results were affected by severe weather and refinery turnaround activity.
- Refinery utilization was high: nine-month average throughput was 295,582 barrels per day versus 248,462 a year earlier. Management said refineries operated at record utilization rates during the first nine months.
- Delek Logistics acquired 3 Bear on June 1 for $628.1 million. Included results from the acquisition were $60.9 million revenue and $8.3 million net income in Q3; the nine-month amounts were $81.5 million and $9.8 million.
- Cash from operations increased to $716.1 million, while investing outflows rose to $819.9 million, largely reflecting the acquisition and capital spending. Financing provided $401.1 million, including net revolver and term-debt proceeds.
- Debt increased from $2,218.0 million at December 31, 2021 to $2,733.6 million at September 30, 2022. Interest expense for the nine months rose to $132.7 million from $100.0 million.
Outlook, management commentary and notable items
- No specific earnings or revenue guidance is provided. Management expected continued global energy-market volatility, while citing strong refined-product demand and plans to operate safely and reliably near nameplate capacity. It noted that Q3 domestic crack spreads had contracted from Q2’s unusually favorable levels.
- Management identified higher natural-gas, labor and other input costs, supply constraints, inflation and rising interest rates as headwinds, and expected cost pressures and supply-chain challenges to continue into 2023. Full-year 2022 capital spending was forecast at approximately $300 million; $174.1 million had been spent through September.
- After quarter-end, Delek renewed its revolving credit facility with a $1.1 billion commitment and maturity in October 2027. Delek Logistics also amended its facilities, increasing aggregate commitments to $1.2 billion, including a $300 million term loan drawn October 13, 2022. These post-quarter transactions change the financing profile and are not reflected in September 30 balances.
- Delek reinstated its quarterly dividend in 2022, paid a special dividend, repurchased $40.0 million of shares in Q3, and had $360.0 million remaining under its repurchase authorization. A $0.21 quarterly dividend was declared after quarter-end.
- Accounting change: Beginning January 1, 2022, Delek changed Tyler refinery inventory accounting from LIFO to FIFO and retrospectively adjusted comparative periods. The filing’s bridge shows this change reduced reported Q3 2022 Delek-attributable income by $93.5 million versus the LIFO calculation; it increased nine-month attributable income by $37.6 million. It also materially affected inventory and retained earnings. Compare periods with this change in mind.
- Other items include a $28.4 million inventory valuation reserve at September 30, insurance-related gains, and $10.6 million of nine-month acquisition and integration costs. The environmental liability was approximately $115.1 million; about $3.1 million was expected to be spent in the following 12 months.
- Key risks include refining-margin and commodity-price volatility, RIN compliance costs and price changes, floating-rate debt exposure, severe weather and operational interruptions, environmental obligations, and successful integration of 3 Bear. Management reported covenant compliance at quarter-end. Disclosure controls were judged effective, though the assessment excluded certain controls at newly acquired 3 Bear.
Most important facts for investors to verify
- How the retrospective FIFO change affects comparisons and the sustainability of reported earnings; in particular, distinguish the filing’s Q3 FIFO result from its LIFO comparison.
- Whether elevated refining margins, utilization and demand persist, and how natural-gas costs, RIN prices and crack spreads affect segment contribution.
- 3 Bear’s ongoing contribution, integration progress, acquisition financing costs and the final purchase-price allocation, which remained preliminary.
- Near-term funding needs and refinancing of the $413.0 million J. Aron amount due in December 2022 and $305.7 million of product financing due by year-end, alongside debt maturities and higher interest rates.
- Cash generation after working-capital movements, the $300 million capital-spending plan, dividends and share repurchases, and compliance with debt covenants.
- Potential exposure from environmental remediation, RIN compliance matters, insurance recoveries and severe-weather or operational disruptions.