Delek Logistics Partners, LP — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. The partnership owns and operates crude oil and refined-products logistics and marketing assets, with significant dependence on Delek Holdings.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $117.6m | $155.3m | $281.0m | $307.8m |
| Operating income | $47.9m | $32.3m | $82.9m | $61.4m |
| Net income attributable to partners | $44.4m | $24.9m | $72.2m | $44.6m |
| Basic net income per limited partner unit | $1.18 | $0.69 | $1.98 | $1.20 |
| EBITDA (non-GAAP) | $64.8m | $44.8m | $113.5m | $84.2m |
| Distributable cash flow (non-GAAP) | $57.0m | $31.2m | $92.7m | $60.1m |
| Cash distributions per unit | $0.900 | $0.850 | $1.790 | $1.670 |
Q2 operating margin was approximately 40.7% versus 20.8% a year earlier; six-month operating margin was approximately 29.5% versus 19.9%. These are calculated as operating income divided by revenue. Q2 contribution margin was $61.3m versus $44.2m; six-month contribution margin was $108.7m versus $84.3m.
Six-month operating cash flow was $72.4m, up from $51.8m. Investing used $114.2m, including acquisitions, while financing provided $52.5m. Cash increased by $10.7m to $16.2m. At June 30, total liquidity was $116.2m, including $100.0m of unused revolving capacity.
Long-term debt on the balance sheet was $995.2m, versus $833.1m at year-end 2019. It comprised $750.0m drawn on the revolving facility and $250.0m principal of 6.75% senior notes due 2025 (carrying value approximately $245.2m). The revolver’s weighted-average rate was 2.78%; management reported covenant compliance.
Material changes and drivers
- Q2 revenue fell 24.3%, mainly because COVID-19-related demand and price declines sharply reduced West Texas wholesale marketing sales. Cost of materials fell 53.2%, helping lift operating income and net income despite lower revenue.
- Pipeline and transportation contribution margin rose to $42.5m from $24.1m, helped by the Big Spring gathering and trucking acquisitions and lower operating expenses. Wholesale marketing and terminalling contribution margin declined to $18.8m from $20.0m; West Texas gross margin per barrel fell to $0.64 from $6.25.
- Six-month revenue declined 8.7%, while operating income increased 35.1% and net income increased 62.0%. Lower wholesale sales and prices were partly offset by new affiliate-related pipeline and trucking revenues and higher income from equity-method investments.
- On March 31, the partnership acquired the Big Spring Gathering Assets for $100m cash and 5.0m units. On May 1, it acquired trucking assets for approximately $48m cash. Both were acquisitions from Delek Holdings and accounted for as common-control transactions.
- Affiliate revenue represented about 74% of Q2 revenue and 69% of six-month revenue. Delek Holdings owns a majority interest in the partnership.
Outlook, risks and unusual items
- Management cited continuing uncertainty from COVID-19, reduced fuel demand, volatile oil prices, U.S. crude storage constraints, lower refinery utilization and the possibility of renewed restrictions. Contractual minimum-volume commitments supported pipeline revenue, but customers could seek relief under force majeure provisions or face collection difficulties.
- Management stated it expected sufficient resources for the next 12 months, including working capital, distributions and capital spending, while noting that future performance and liquidity depend on operating conditions and financing access. No earnings guidance was provided.
- The 2020 capital spending forecast was reduced to $18.3m from $22.7m; nonessential projects were suspended or deferred. Management said further revisions remained possible.
- The partnership declared a $0.900 per-unit distribution for Q2, payable August 12, 2020, and gave 2020 distribution-growth guidance of $0.01–$0.015 per unit each quarter. The filing also describes a waiver of IDR distributions associated with the 5.0m acquisition units through at least the quarter ending March 31, 2022, subject to specified conditions.
- Key risks include dependence on Delek Holdings and its ability to perform under commercial agreements; commodity and demand volatility; debt and floating-rate exposure; operating and environmental incidents; and potential asset or goodwill impairment. A hypothetical 1% rate change on floating-rate debt would change annual interest expense by approximately $7.5m.
- No material releases occurred in the first half of 2020. The 2019 Sulphur Springs diesel release required further monitoring and remediation; the partnership had accrued $0.3m for release-related matters overall and reported additional 2020 Sulphur Springs cleanup costs of $0.3m for the six-month period. Management did not expect pending litigation to have a material adverse effect.
Important facts for investors to verify
- Whether acquisition-related affiliate commitments and minimum-volume protections continue to support cash flow as pandemic-driven demand and refinery activity change.
- Current leverage, revolver availability, covenant headroom and the cost of floating-rate borrowing.
- Distribution coverage and the sustainability of the $0.900 quarterly distribution and stated growth guidance.
- Realized performance of the Big Spring and trucking assets, including acquisition economics, additional planned spending and related-party terms.
- West Texas marketing volumes and margins, customer receivables, and any subsequent impairment, environmental or COVID-19 developments.