Delek US Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Delek operates refining, logistics and retail businesses. Financial amounts are in millions of dollars except per-share data and where noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $1,535.5 | $2,480.3 | $3,356.7 | $4,680.2 |
| Operating income (loss) | $22.8 | $134.3 | $(338.7) | $356.7 |
| Net income (loss) attributable to Delek | $87.7 | $77.3 | $(226.7) | $226.6 |
| Basic EPS | $1.19 | $1.01 | $(3.08) | $2.94 |
- Q2 revenue fell 38.1%; management cited lower refined-product prices and volumes amid COVID-19-related demand weakness. Six-month revenue declined 28.3%.
- Q2 earnings included a $56.9 gain on the Bakersfield refinery sale and significant inventory valuation and hedging effects. Despite positive Q2 net income, operating income dropped substantially. For the six-month period, refining contribution margin was $(230.7), versus $500.0 a year earlier.
- Q2 segment contribution margins: Refining $59.7 (prior year $198.1); Logistics $61.4 ($44.2); Retail $24.3 ($17.6). Retail fuel margins improved, while fuel volumes weakened; merchandise sales increased.
- Operating cash flow was negative $323.1 for the first six months, versus positive $235.4 in 2019. Investing cash outflow was $155.9; financing provided $372.7. Cash declined $106.3 to $849.0.
- At June 30, total debt, net of discounts and financing costs, was $2,454.9, up from $2,067.1 at year-end 2019. Supply-and-offtake obligations were an additional $314.0. Unused revolving-facility commitments were approximately $795.4; outstanding letters of credit were $204.6.
- Current assets were $2,372.9 and current liabilities $1,589.3. The balance sheet included a $193 tax receivable tied to CARES Act net operating loss carrybacks, expected to be collected in the first half of 2021.
Material changes and unusual items
- COVID-19 and oil-market disruption drove lower fuel demand, product prices and crack spreads. Management reported Q2 crack spreads were 62%–76% below the comparable prior-year levels.
- Inventory valuation reserves were $77.0 at June 30, versus $1.7 at December 31, 2019. Changes in inventory valuation and derivative gains or losses materially affected reported refining results; the filing describes large, offsetting Q2 movements.
- Delek sold its non-operating Bakersfield refinery on May 7 for $40.0 cash consideration. The $56.9 accounting gain largely reflected the buyer assuming related environmental and asset-retirement obligations. Delek received a call option to acquire up to a one-third interest in the buyer’s subsidiary after commercial operations begin.
- Delek increased its investment in Delek Logistics through asset transfers, including the Big Spring Gathering System and trucking assets. Delek Logistics borrowed to fund these transactions; Delek reported a 69.1% interest in the partnership at quarter-end.
- Long-term debt increased in part after a $200.0 incremental term loan issued in May at a 7% original issue discount. The new loan carries a higher margin than the existing term-loan class.
- The J. Aron supply-and-offtake agreements were extended to December 2022, with J. Aron able to extend further to May 2025. Up to $58.8 of the fixed step-out liability may become payable early if specified periodic price adjustments are triggered.
Outlook, risks and contingencies
- The filing gives no specific earnings or revenue guidance. Management reduced its 2020 capital spending forecast to $250.0 from $325.7, suspended share repurchases, pursued cost reductions and reviewed production, maintenance, liquidity and dividend plans. Nonessential projects were deferred, with some expected to resume in 2021.
- The board declared a Q3 dividend of $0.31 per share, payable September 3, 2020. The company had suspended share repurchases; $229.7 remained under the authorization.
- Management warned that the duration and resurgence of COVID-19, demand recovery, oil supply and prices, crack spreads, refinery reliability, employee impacts and customer credit quality could affect earnings, cash flow, liquidity and asset values. No impairment indicator was identified as of June 30, but sustained adverse conditions could lead to future impairment.
- Delek reported compliance with debt covenants at quarter-end and expected to remain compliant, while cautioning that worsening conditions could affect compliance and access to financing. Environmental liabilities were approximately $112.9, with about $6.6 expected to be spent within 12 months. Management did not expect pending litigation to have a material adverse effect.
Important facts for investors to verify
- How much Q2 and year-to-date earnings depended on inventory valuation, hedging, the refinery-sale gain and CARES Act tax benefits, and how recurring underlying refining performance was.
- Current operating cash flow, working-capital needs, debt and interest costs, and whether the $193 tax receivable is collected as expected.
- Whether the J. Aron periodic price adjustments trigger cash payments, and the status of covenant headroom and available credit facilities.
- How quickly fuel demand and crack spreads recover, and whether COVID-19 or market conditions prompt further throughput, capital-spending or dividend changes.
- Progress and funding needs for the WWP pipeline investment, Delek Logistics transactions, and remediation obligations.