Business context and reporting period
Delek Logistics Partners, LP (NYSE: DKL) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The partnership provides gathering, transportation, storage, wholesale marketing and terminalling services, with a substantial portion of its business tied to Delek Holdings.
On June 1, 2022, DKL completed its approximately $624.5 million acquisition of 3 Bear, adding Delaware Basin crude oil and natural gas gathering, processing and transportation, plus water disposal and recycling. Results include one month of 3 Bear operations.
Financial and operating highlights
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $266.8M | $168.5M | $473.3M | $321.4M |
| Operating income | $42.2M | $48.4M | $89.0M | $90.6M |
| Net income attributable to partners | $32.2M | $43.2M | $71.7M | $79.5M |
| Diluted earnings per unit | $0.74 | $1.00 | $1.65 | $1.83 |
| EBITDA (non-GAAP) | $64.5M | $66.8M | $130.5M | $125.6M |
| Distributable cash flow (non-GAAP) | $49.4M | $53.8M | $101.1M | $106.4M |
| Cash distributions per unit | $0.985 | $0.940 | $1.965 | $1.860 |
Q2 revenue increased 58.3%, while net income fell about 25.6%. Revenue growth reflected the acquisition, higher selling prices and volumes in West Texas marketing, and higher pipeline throughputs. Higher product costs, operating expenses, acquisition-related general and administrative costs, depreciation and interest weighed on earnings. The filing does not provide a single consolidated gross-margin percentage; contribution margin was $69.4M in Q2 2022 versus $64.2M a year earlier.
For the six months, operating cash flow was $133.1M, compared with $147.5M. Investing cash outflow was $659.3M, including the acquisition; financing cash inflow was $535.8M. Cash at June 30 was $13.8M, versus $4.3M at year-end 2021.
At June 30, total debt was $1.52B, compared with $899.0M at December 31, 2021. This comprised approximately $880.3M drawn on the revolving credit facility and $250M and $400M principal on senior notes due 2025 and 2028, respectively. The facility had $119.1M of unused commitments; reported total liquidity was $132.9M. DKL reported compliance with debt covenants. The revolving facility matures September 28, 2023.
Material changes versus the prior comparable period
- Q2 and six-month revenue rose sharply, but earnings per unit declined. Wholesale marketing revenue growth largely reflected higher commodity prices; its Q2 contribution margin decreased 14.0% to $16.3M, and West Texas gross margin per barrel fell to $2.67 from $4.24.
- Pipeline and transportation contribution margin grew 7.0% in Q2 to $48.4M, supported by higher throughputs, partly offset by higher costs.
- 3 Bear contributed $20.6M of revenue and $4.7M of segment contribution margin during June. The acquisition was funded with cash and revolver borrowings, materially increasing debt and leverage exposure.
- Q2 interest expense increased 44.2% to $16.8M, primarily due to acquisition-related borrowing and higher floating rates. A hypothetical one-percentage-point rate increase on floating-rate debt outstanding at quarter-end would increase annual interest expense by approximately $8.8M.
- Q2 general and administrative expense increased 129.9% to $13.8M; six-month expense included $6.4M of acquisition and integration costs.
Outlook, management commentary, risks and contingencies
Management set 5% distribution-growth guidance for full-year 2022. The declared Q2 distribution was $0.985 per unit, or $3.94 annualized, payable August 11, 2022. Management expects the 3 Bear acquisition to be immediately accretive and sees potential growth from dedicated acreage, minimum-volume commitments, Delaware Basin activity and expanded services; these are expectations, not guarantees. The acquisition’s purchase-price allocation remains preliminary.
Management cited inflation, higher interest rates, recession risk, uncertain commodity demand and prices, supply constraints, the Russia-Ukraine war, and regulatory and environmental developments as relevant market factors. It reported approximately $116.1M of planned 2022 capital spending, including growth projects, and $53.0M of remaining 2022 spending commitments for additional receipt points. Management said it believes resources are sufficient for the next 12 months, including distributions and capital expenditures, but funding and cash generation remain dependent on operating conditions and access to capital.
Key exposures include dependence on Delek Holdings as a major customer and its ability to perform under commercial agreements; wholesale marketing margin and commodity-price volatility; acquisition integration and realization of expected benefits; refinancing and floating-rate risk; and operational, weather, environmental, and pipeline-release risks. DKL disclosed ongoing remediation of the August 2021 Greenville-Dixon release, with $3.9M of costs incurred through June 30 and $2.2M of remediation expense recorded in Q2 and the first half of 2022. It expects additional costs to be nominal, while noting regulatory authorities could require further remediation. The filing reports no significant releases during the first half of 2022 and no pending legal proceeding believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether 3 Bear integration, operating performance and expected acquisition accretion develop as management anticipates; the acquired business contributed results for only one month in this report.
- Debt, covenant headroom, borrowing costs and refinancing plans ahead of the September 2023 revolving-facility maturity, particularly if interest rates or market access worsen.
- Distribution coverage and cash generation: Q2 distributable cash flow of $49.4M was below the $42.8M quarterly distribution only after considering the measure’s defined adjustments; assess the company’s calculation and cash needs alongside GAAP cash flow and planned investment.
- Wholesale marketing economics, including per-barrel margins, and whether higher nominal revenue translates into sustainable contribution margin.
- Final acquisition valuation and purchase-price adjustments, remaining growth-capital commitments, and any additional environmental remediation costs.