Delek US Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Delek is an integrated downstream energy company operating refining, logistics and retail businesses. Its four operating refineries have combined nameplate capacity of 302,000 barrels per day. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2,480.3 | $2,636.9 | $4,680.2 | $4,990.1 |
| Operating income | $134.3 | $135.1 | $356.7 | $173.9 |
| Net income attributable to Delek | $77.3 | $79.1 | $226.6 | $38.7 |
| Diluted EPS | $1.00 | $0.89 | $2.91 | $0.45 |
| Operating cash flow | Not stated separately | Not stated separately | $235.4 | $(136.4) |
- Revenue fell 5.9% in Q2 and 6.2% for the first half, mainly reflecting lower refined-product prices and lower wholesale and retail sales prices. Q2 operating income was nearly flat; first-half operating income more than doubled.
- Refining margin, a company-defined non-GAAP measure, was $293.3 in Q2 versus $290.2, and $708.6 for the first half versus $538.2. Refining segment contribution margin was $178.3 and $472.6, respectively, compared with $177.0 and $310.3. Q2 improvement included lower RIN costs and the new Krotz Springs alkylation unit; first-half results also benefited from a $51.5 inventory-reserve reversal.
- Logistics contribution margin was $44.2 in Q2 versus $45.4 and $84.3 for the first half versus $81.7. Retail contribution margin was $17.6 versus $18.6 in Q2 and $27.8 versus $30.5 for the first half.
- Six-month operating cash flow improved by $371.8 year over year, supported by higher earnings and derivative fair-value movements. Investing used $329.4, including $199.9 of property and equipment purchases and $136.4 of equity-investment contributions. Financing used $33.9. Cash declined $127.9 to $951.4 from year-end 2018.
Balance sheet, debt and liquidity
- At June 30, cash was $951.4; total debt and notes payable were $1,916.7, including $64.4 current. Reported unused credit commitments or borrowing-base availability were approximately $911.1; $267.2 of letters of credit were outstanding.
- Total debt increased from $1,783.3 at year-end 2018. In May, Delek borrowed $250.0 of incremental term loans; Delek Logistics also borrowed substantially to fund its Red River investment. Delek reported covenant compliance.
- Current assets were $2,787.3 and current liabilities $2,058.7. The balance sheet also includes $201.3 of operating lease liabilities following adoption of the lease standard; the adoption recognized a $211.0 lease liability and matching right-of-use asset without material income-statement impact.
Changes, outlook, risks and unusual items
- Comparisons: Q2 revenue and Delek-attributable net income declined, while diluted EPS increased. First-half earnings rose sharply, partly reflecting improved refining performance and the absence of several 2018 items, including a $27.5 impairment and $9.0 debt-extinguishment loss. The 2018 period also included a $13.2 gain on asphalt-asset sales and approximately $115.5 of RIN-waiver and biodiesel-tax-credit benefits that did not recur. Prior-year revenue and materials were corrected by $73.4 for an intercompany-elimination error, with no effect on operating or net income; a separate $5.5 tax correction was also reported for first-half 2018.
- Capital plans and investments: Management forecast full-year 2019 capital spending of $396.2; $214.3 had been spent by June 30. The $138.0 Krotz Springs alkylation project was completed in April and contributed approximately $14.5 to Q2 refining contribution margin. Delek Logistics invested approximately $124.7 for a 33% interest in the Red River pipeline joint venture. A July 2019 agreement for a 15% interest in Wink to Webster is expected to require $340–$380 of contributions over two to three years, including an initial $40 contribution. No full-year earnings guidance is provided in the filing.
- Shareholder returns and operations: Delek repurchased 2.94 million shares for $104.8 in the first half, with $304.9 remaining under its authorization. The board declared a $0.29-per-share dividend for September 2019. The company closed or sold 20 stores in the first half and planned to close 10 more during the remainder of 2019. The 7-Eleven branding termination requires removal of store branding by December 31, 2021 or earlier as locations are de-identified or closed.
- Risks and contingencies: Results remain exposed to refining-margin and crude/product differential volatility, RIN prices, operational reliability, regulation, interest rates, credit access and capital-project costs. Environmental liabilities totaled approximately $142.3; the Big Spring refinery consent decree may require significant pollution-control capital spending over the next 10 years. Delek reported four crude releases in Q1 2019, with cleanup substantially completed and regulatory closure expected by year-end. A June easement judgment of $6.7 was accrued. A July settlement of the Ten-Tex litigation reduced the related accrual by $2.4, leaving an estimated $2.6 obligation. Management stated pending proceedings were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
- Management outlook: Management believed available cash sources would cover anticipated operating and capital requirements for at least 12 months. It cautioned that capital budgets may change with project scope, costs, timing and regulatory requirements. The filing notes that seasonal demand generally supports stronger results in the second and third quarters than in the first and fourth.
Key facts for investors to verify
- Whether the first-half improvement in refining contribution margin is sustainable after separating the inventory-reserve reversal and nonrecurring 2018 RIN and tax-credit benefits.
- Operating performance and turnaround-related sales-volume effects at El Dorado and other refineries, and the alkylation unit’s continuing contribution.
- Funding, returns and execution risks for the Red River and Wink to Webster pipeline investments, including the planned $340–$380 contribution.
- Debt levels, floating-rate exposure, credit availability and covenant headroom as investment and capital-spending commitments proceed.
- Actual environmental remediation and consent-decree spending, crude-release closure, and final costs of the disclosed litigation settlements.