Business context and reporting period
Delek US Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The integrated downstream energy company operates refining, logistics and retail businesses. Its refining system had 302,000 barrels-per-day nameplate capacity, and its retail segment operated 252 convenience stores. Delek owned 80% of consolidated subsidiary Delek Logistics Partners.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Net revenue | $2,191.5 million; up 42.7% year over year | $4,583.7 million; up 36.6% |
| Operating income (loss) | $(85.4) million, versus $22.8 million income | $(165.5) million, versus $(338.7) million loss |
| Net income (loss) attributable to Delek | $(81.1) million, or $(1.10) per diluted share | $(179.7) million, or $(2.43) per diluted share |
| Operating cash flow | Not presented separately | $134.9 million, versus $(323.1) million |
| Capital expenditures | Not presented separately | $132.7 million, versus $235.4 million |
Second-quarter refining segment contribution margin was $(19.9) million versus $59.7 million a year earlier; logistics contribution margin was $64.2 million versus $61.4 million; and retail contribution margin was $21.9 million versus $24.3 million. For the six months, refining contribution margin improved to $(41.1) million from $(230.7) million, logistics increased to $121.9 million from $108.7 million, and retail increased to $38.8 million from $36.6 million.
At June 30, cash and cash equivalents were $833.0 million, total assets $6.788 billion, and stockholders’ equity $952.4 million. Reported debt, net of financing costs and discounts, was $2.244 billion, down from $2.348 billion at December 31, 2020. Total liquidity was approximately $2.1 billion, including cash and $1.255 billion of unused availability under the Delek and Delek Logistics revolving facilities. The company also had $305.9 million of outstanding letters of credit. Current liabilities included $358.8 million of product financing agreements, due by December 31, 2021. The J. Aron supply-and-offtake obligation totaled $496.3 million.
Material changes versus the prior comparable period
- Revenue rose substantially as refined-product prices recovered from 2020 levels. However, higher crude feedstock costs, sharply higher renewable identification number (RIN) costs, operating disruptions and weaker inventory-valuation benefits contributed to the second-quarter operating loss.
- Crack spreads improved year over year in the second quarter, while refining margin fell to $93.9 million from $148.4 million. The comparison was affected by a $203.1 million inventory-valuation benefit in second-quarter 2020 versus $9.7 million in second-quarter 2021, and by lower hedging losses in 2021.
- Six-month operating cash flow improved by $458.0 million year over year. Working-capital movements were significant, including a $671.4 million source of cash from accounts payable and other current liabilities, partly offset by cash uses from receivables and inventories.
- Investing cash outflow narrowed to $118.7 million from $155.9 million, largely reflecting lower capital spending. Financing cash flow fell to $29.3 million from $372.7 million; Delek Logistics issued $400 million of 7.125% notes due 2028 during the quarter.
- The company paid no common dividends in the first half of 2021, compared with $0.62 per share declared in the first half of 2020. The dividend suspension began in the fourth quarter of 2020.
Outlook, commentary, risks and unusual items
Management described demand and economic activity as recovering but still uncertain, with COVID-19 variants and uneven fuel-demand recovery posing risks. No specific earnings or margin guidance was provided. Management forecast 2021 capital spending of approximately $180.6 million, subject to change; $132.7 million had been spent through June.
- RIN exposure: Higher RIN prices pressured refining margins and increased the recorded RIN obligation. A second-quarter review led to a $12.3 million adjustment increasing that obligation. Following a June Supreme Court ruling, Delek submitted 2020 small-refinery-exemption applications in August; their outcome and financial effects were uncertain.
- Operational disruptions: Winter Storm Uri affected all refineries in February, causing reduced throughput, higher costs and equipment damage. A February fire at the El Dorado refinery injured six employees and disrupted operations. Insurance claims and potential recoveries remained under review; incremental losses were not yet determinable.
- Environmental and regulatory exposure: Recorded environmental liabilities were approximately $112 million. Delek also self-reported RIN-related instances of non-compliance to the EPA; potential penalties could not yet be estimated, though management did not expect them to be material relative to the total RIN obligation.
- Other contingencies: A proposed $44.8 million settlement of shareholder litigation was subject to court approval; insurers had agreed to fund approximately $42.5 million. Delek accrued approximately $6.5 million for its uninsured settlement portion and remaining legal fees. A separate $6.4 million easement judgment remained under appeal.
- Tax refund: Delek received $156.2 million in federal tax refunds in July and August 2021, after quarter-end, related to CARES Act net-operating-loss carrybacks.
- Capital and covenants: Management said it was in compliance with debt covenants at June 30 and expected continued compliance, while cautioning that worsening conditions could affect covenant capacity and access to financing. Floating-rate debt was approximately $1.595 billion; a one-percentage-point rate increase would raise annualized interest expense by about $15.9 million.
- Shareholder activism: Stockholders rejected CVR Energy’s director nominees at the May annual meeting, and Delek reported significant costs related to the contested election.
Most important facts for investors to verify
- Whether refining profitability recovers as demand, crack spreads and RIN prices evolve, and how any EPA exemption decisions affect RIN costs and cash flows.
- The full operational and financial effects of Winter Storm Uri and the El Dorado fire, including insurance recoveries and repair costs.
- Near-term liquidity needs, especially the $358.8 million of product financing due by year-end 2021, covenant compliance and refinancing access.
- Whether operating cash generation remains durable after the favorable working-capital movements in the first half.
- The status and final cost of the shareholder litigation settlement, environmental remediation obligations and EPA compliance matters.