Delek US Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with the three months ended March 31, 2018. Amounts are in millions of dollars except per-share data and where noted.
Business context
Delek is an integrated downstream energy company with refining, logistics and retail segments. Its four operating refineries had combined nameplate capacity of 302,000 barrels per day. Delek consolidated Delek Logistics and owned a 61.4% limited-partner interest in it at quarter-end.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenues | $2,199.9 | $2,353.2 |
| Operating income | $222.4 | $38.8 |
| Income (loss) attributable to Delek | $149.3 | $(40.4) |
| Diluted EPS | $1.90 | $(0.49) |
| Cash from operating activities | $133.4 | $(190.7) |
| Capital expenditures and turnaround spending | $124.0 cash outflow | $71.0 cash outflow |
Operating margin was approximately 10.1% of revenue, versus 1.6% a year earlier. Refining contribution margin rose to $294.3 from $133.2; logistics contribution margin increased to $40.1 from $36.3; retail contribution margin declined to $10.2 from $11.9. Refining margin, a company-defined non-GAAP measure, increased to $415.3 from $247.9.
At March 31, cash was $989.7, total debt was $1,761.1, and unused commitments under revolving facilities were approximately $862.4. Current assets were $2,760.7 and current liabilities were $1,860.9. The company reported $226.4 of letters of credit issued and stated it was in compliance with debt covenants. The board declared a $0.27-per-share quarterly dividend; a $0.28 dividend was declared after quarter-end.
Changes versus the prior period
- Revenue fell 6.5%, while operating income improved substantially and the company returned to net income. Lower commodity selling prices and weaker logistics wholesale activity weighed on revenue.
- Refining results benefited from wider crude differentials, a higher Gulf Coast 5-3-2 crack spread, lower RIN expense and a $52.1 inventory-reserve reversal benefit. The 5-3-2 spread averaged $13.02 per barrel versus $11.53.
- Some comparison benefits were offset by the absence of approximately $115.5 in Q1 2018 benefits from RIN waivers and a biodiesel tax credit. Q1 2018 also included a $27.5 impairment of asphalt assets held for sale and a $9.0 debt-extinguishment loss.
- Operating cash flow improved, but capital and turnaround cash spending increased. Cash declined by $89.6 during the quarter, including $46.2 of share repurchases and $21.0 of dividends paid.
- Delek adopted lease accounting on January 1, 2019, recognizing $211.0 of lease liabilities and corresponding right-of-use assets, with no opening retained-earnings impact.
Outlook, commentary and risks
- Management said cash from operations, borrowing facilities and potential capital-market access should be sufficient for anticipated operating and capital needs for at least 12 months. Planned 2019 capital spending was $394.1; actual Q1 capital spending was $128.4 on the segment reporting basis.
- The Krotz Springs alkylation unit was completed in early April at a reported total cost of approximately $138.0. Management expects it to improve conversion of lower-value products into gasoline, add product flexibility and reduce dependence on crack-spread conditions over time.
- Delek elected not to proceed with the proposed Permian-to-Gulf Coast pipeline joint venture, preserving the option to explore other long-haul pipeline alternatives.
- January amendments to the El Dorado and Krotz Springs supply-and-offtake agreements changed baseline step-out pricing from market-indexed to fixed pricing, reducing commodity-price exposure but leaving interest-rate fair-value risk. The amendments generated gains in cost of materials and other, as well as fees charged to interest expense.
- Floating-rate borrowings totaled approximately $1,454.2; management estimated a 1-percentage-point rate change would change annual interest expense by about $14.5. Key business risks include volatile crude and product prices and refining margins, RIN costs, asset reliability, turnarounds, regulation, environmental compliance, financing and counterparty risks.
- Environmental liabilities were approximately $143.2. An amended Big Spring EPA consent decree was expected to become final in Q2 2019 and would require a $0.5 civil penalty and potentially significant pollution-control capital spending over ten years. Delek also reported four crude releases in Q1 2019; $2.2 was accrued for the Magnolia Release proceedings.
- Management did not expect pending legal proceedings to have a material adverse effect. The filing reports no material change in previously disclosed risk factors and no material change in contractual obligations during the quarter.
Important facts for investors to verify
- How much of Q1’s earnings improvement reflects sustainable refining conditions versus the $52.1 inventory-reserve reversal and other nonrecurring or timing items.
- Refinery utilization, turnaround effects and realized margins, particularly at El Dorado, Tyler and Krotz Springs, and whether the alkylation project delivers expected returns.
- Cash conversion and working-capital movements, given the quarter’s receivable and inventory changes, increased capital spending and cash decline.
- Availability and cost of liquidity after accounting for debt maturities, letters of credit, supply-and-offtake obligations, lease liabilities and covenant terms.
- Future environmental spending and remediation exposure, including the Big Spring consent decree and pipeline-release matters.
- RIN price exposure, hedge positions and the effect of crude differentials and commodity-price volatility on refining earnings.