Business context and reporting period
Delek US Holdings, Inc. (Old Delek) reported unaudited results for the quarter and six months ended June 30, 2017. Its businesses included refining, logistics and wholesale marketing; retail operations sold in November 2016 were reported as discontinued operations. Old Delek operated two refineries with combined design capacity of 155,000 barrels per day and held a 47% equity-method investment in Alon USA.
Effective July 1, 2017, Delek and Alon USA merged into New Delek, with Alon and Old Delek becoming wholly owned subsidiaries. Accordingly, this quarter’s financial statements reflect Old Delek before the merger.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,230.7 million | $1,147.3 million | $2,412.8 million | $2,033.4 million |
| Operating income (loss) | $(46.5) million | $11.3 million | $(16.8) million | $(2.3) million |
| Net income (loss) | $(32.2) million | $(0.6) million | $(16.9) million | $(24.5) million |
| Net income (loss) attributable to Delek | $(37.9) million | $(7.0) million | $(26.7) million | $(36.2) million |
| Basic and diluted loss per share | $(0.61) | $(0.11) | $(0.43) | $(0.59) |
Q2 sales increased 7.3%, but operating results swung to a loss as costs rose faster than revenue. Six-month sales rose 18.7%; the attributable loss narrowed, helped in part by improved results from the Alon USA equity investment. Refining segment contribution margin was $(14.0) million in Q2 (versus $40.0 million) and $50.4 million for the half year (versus $63.5 million). Logistics contribution margin increased to $31.7 million in Q2 from $30.0 million and to $58.3 million for the half year from $56.8 million.
Margins: the Gulf Coast 5-3-2 crack spread averaged $10.68 per barrel in the first half, compared with $8.74 in 2016. Q2 refining contribution was nevertheless pressured by hedge losses, inventory valuation losses and higher refinery operating costs. The filing does not provide a consolidated operating margin percentage.
Cash flow, debt and liquidity
For the six months, operating cash flow was $(36.3) million, versus $156.6 million in 2016; investing cash flow was $(42.7) million versus $(59.4) million; and financing cash flow was $(37.9) million versus $(22.3) million. Cash declined $116.9 million to $572.3 million. Capital expenditures were $35.0 million on a cash-flow basis and $30.2 million in the segment capital-spending presentation.
At June 30, cash was $572.3 million and total debt was approximately $822.5 million, down from $832.9 million at year-end 2016. Reported unused revolving commitments or borrowing-base availability totaled approximately $684.0 million; letters of credit outstanding were approximately $110.0 million. The company said it was in compliance with debt covenants and believed operating cash flow and borrowing capacity would cover anticipated operating and capital needs for at least 12 months.
Delek Logistics issued $250 million of 6.750% senior notes due 2025 in May. Total current assets were $1,311.7 million and current liabilities $875.8 million. The company declared dividends of $0.15 per share for each quarter; a further $0.15 dividend was declared August 1, payable September 13, 2017.
Material changes, outlook and notable items
- Revenue growth reflected higher refined-product prices and some volume gains. Cost of goods sold increased 12.9% in Q2 and 19.1% for the half year, reflecting higher crude and product costs. Q2 G&A also rose, partly from merger expenses.
- El Dorado received an EPA small-refinery exemption for 2016 renewable-fuel requirements, reducing first-half RIN expense by approximately $47.5 million.
- Q2 refining results included approximately $29.5 million of segment derivative losses and $14.0 million of inventory losses; the first half included $30.3 million of refining derivative losses. The $42.4 million business-interruption insurance proceeds recognized in first-half 2016 did not recur.
- After the reporting date, the merger issued approximately 19.3 million incremental New Delek shares, with reported stock consideration of approximately $499.8 million. Purchase accounting valuations were still being determined. Management cited potential synergies and expected the merger to be accretive to 2018 EPS if certain pre-tax synergies are achieved; this was a preliminary expectation, not a guarantee. No specific earnings guidance was provided.
- Old Delek forecast $95.0 million of 2017 capital spending; the filing separately estimated approximately $74.5 million of remaining 2017 capital expenditures for Alon USA and subsidiaries. Spending could change with project costs, timing and scope.
- Key risks include refining-margin and commodity-price volatility, derivative exposure, RIN costs, merger integration and execution, higher combined debt and financing needs, environmental and regulatory compliance, operational interruptions, and uncertainty around litigation. Recorded environmental liabilities were approximately $6.8 million; a Big Spring refinery consent decree, if finalized, would require a $456,250 penalty and potentially significant pollution-control capital spending over five years.
- Management stated that pending litigation was not expected to have a material adverse effect, but it could not estimate the outcome or possible loss in the shareholder fiduciary-duty suit related to the merger. The company also must repurchase consigned inventory at prevailing market prices upon termination or expiration of its J. Aron supply-and-offtake arrangement.
Important facts for investors to verify
- Whether post-merger integration costs, debt refinancing and synergies differ materially from management’s preliminary expectations, including the basis for the anticipated 2018 EPS accretion.
- Whether refining margins and cash generation recover, given Q2’s refining losses, first-half negative operating cash flow, hedge results and inventory valuation exposure.
- Combined-company debt, liquidity, covenant headroom and capital spending after integrating Alon USA; the filing’s $822.5 million debt figure is Old Delek’s pre-merger amount.
- Actual environmental compliance and remediation expenditures, the final Big Spring consent decree, and the outcome or potential cost of merger-related litigation.
- Whether the RIN waiver benefit is nonrecurring and how future RIN prices and regulatory requirements affect refining economics.