Delek US Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results include Delek Logistics Partners, in which Delek held a 78.7% interest. Unless noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $4,195.6 | $5,982.6 | $8,119.9 | $10,441.7 |
| Operating income | $50.1 | $493.3 | $192.9 | $540.0 |
| Net income (loss) attributable to Delek | $(8.3) | $361.8 | $56.0 | $368.4 |
| Basic earnings (loss) per share | $(0.13) | $5.11 | $0.84 | $5.12 |
| EBITDA attributable to Delek (non-GAAP) | $157.7 | $573.8 | $397.7 | $690.2 |
| Interest expense, net | $80.4 | $43.6 | $156.9 | $82.0 |
Q2 net revenue fell 29.9% year over year; Delek reported a net loss attributable to the company after lower operating income and higher interest expense. For the first half, attributable net income declined to $56.0 million. Lower refining margins were the main operating pressure: refining margin was $269.2 million in Q2 versus $778.4 million, and $604.9 million for the half versus $980.5 million. Refining margin as a share of segment revenue was 6.6% in Q2 versus 13.2%, and 7.7% for the half versus 9.5%.
Q2 segment EBITDA attributable to Delek was $110.5 million for Refining, $90.9 million for Logistics, $15.0 million for Retail and $(58.7) million for Corporate, Other and Eliminations. Logistics EBITDA benefited from higher throughput and the Delaware Gathering acquisition; Refining EBITDA fell sharply with weaker crack spreads and utilization. Retail Q2 EBITDA increased to $15.0 million from $12.5 million, while first-half Retail EBITDA decreased to $21.4 million from $22.8 million.
Cash flow, liquidity and debt
- First-half operating cash flow was $490.2 million, compared with $585.9 million. Investing cash outflow was $279.9 million, including $277.6 million of property, plant and equipment purchases; financing cash outflow was $230.0 million. Cash declined $19.7 million to $821.6 million.
- At June 30, 2023, reported liquidity was approximately $1.6 billion: $821.6 million cash plus $787.5 million in unused revolving credit commitments. The Delek Logistics revolver had $89.0 million available; Delek’s revolver had $698.5 million available.
- Debt, net of discount and deferred financing costs, was $2,810.9 million, down from $3,053.7 million at year-end 2022. Principal debt was $2,873.8 million. Management reported a $246.7 million reduction in long-term obligations and covenant compliance at quarter-end.
- Floating-rate borrowings were approximately $2,223.8 million; management estimated a 1 percentage-point rate increase would raise annual interest expense by about $22.2 million. Delek Term Loan effective interest was 9.95%; Delek Logistics’ term loan matures in October 2024.
- Additional financing obligations include $322.4 million of product financing agreements due within 12 months and a $453.4 million non-current inventory intermediation obligation. The filing’s contractual-obligations table estimates $6,822.5 million in total payments across debt, interest, leases, purchase and transportation commitments, product financing, and inventory intermediation.
Material changes and operating developments
- Refining revenue and margins were pressured by lower product prices and crack spreads compared with the unusually strong prior-year quarter. Q2 refinery utilization was 93.5%, down from 97.6%; unplanned downtime, a Big Spring catalyst change and weather disruptions at El Dorado affected throughput. Tyler throughput improved following its Q1 turnaround.
- First-half capital spending was $253.3 million; the company forecast full-year 2023 capital spending of $350.5 million, including $174.0 million for refining sustaining maintenance and turnaround activities.
- Delek repurchased 1.81 million shares for $40.4 million in the first half; $230.1 million remained authorized at June 30. It declared a $0.235-per-share dividend after quarter-end and reported further post-quarter repurchases of 981,690 shares for approximately $25 million.
- The company amended its United Community Bank revolver in June, reducing commitments from $50 million to $25 million and extending maturity to June 2024. A June agreement with Citi temporarily increased a letter of credit by $100 million to defer certain inventory-intermediation payments until July, subject to interest.
Outlook, risks and unusual items
Management expected seasonal gasoline and diesel demand and continued strong downstream market conditions for the remainder of 2023, citing constrained supply and anticipated refinery utilization. It provided no numerical earnings or margin guidance in the supplied filing text. Management also noted uncertainty in global crude and product supply and demand and prepared for potential economic headwinds. Safety Action Plan maintenance costs and additional, previously unbudgeted capital and labor needs were expected to continue at least through 2023.
Key exposures include volatile crude and refined-product prices, crack spreads and crude differentials; RIN and other environmental-credit costs; refinery reliability, turnarounds and unplanned outages; floating interest rates, debt-market access and covenant restrictions; inflation and labor or supply-chain costs; and environmental, climate and regulatory requirements. Delek recorded environmental liabilities of approximately $114.7 million, with most expected expenditures by 2032, though some could extend up to 30 years. The company said pending litigation was not expected to have a material adverse effect; it reported no material changes to its stated risk factors.
Unusual or period-specific items include an approximately $8 million Q2 inventory correction for spare parts, which management characterized as immaterial; insurance recoveries relating to prior refinery fires and Winter Storm Uri; and gains from changes in the fair value of the Citi inventory-intermediation obligation. The company also cited higher interest costs as a major year-over-year earnings headwind. The filing states disclosure controls were effective and no material change in internal control over financial reporting occurred during Q2.
Important facts for investors to verify
- Whether refining margins and utilization recover, and whether Big Spring and El Dorado operations avoid further disruptions.
- How the $322.4 million product-financing balance due within a year and the Citi intermediation obligations affect working capital and liquidity.
- Debt maturity, floating-rate exposure, refinancing needs and compliance with facility covenants, particularly Delek Logistics’ October 2024 term-loan maturity.
- Execution and funding of the $350.5 million 2023 capital plan, including safety-related spending and turnaround costs.
- Future RIN/environmental-credit costs, remediation obligations, and the outcome of insurance claims and the terminal-property dispute.
- Whether dividends and repurchases remain supportable given operating cash flow, debt service and planned investment needs.