Business context and reporting period
Delek US Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. Delek operates petroleum refineries, crude and product logistics and wholesale marketing, and convenience stores. The 2018 results include Alon, acquired effective July 1, 2017; the 2017 comparison reflects Old Delek before the merger and is therefore not like-for-like.
Key financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenue | $2,563.5 million, versus $1,230.7 million | $4,916.7 million, versus $2,412.8 million |
| Operating income (loss) | $135.1 million, versus $(46.5) million | $173.9 million, versus $(16.8) million |
| Net income (loss) attributable to Delek | $79.1 million, versus $(37.9) million | $44.2 million, versus $(26.7) million |
| Diluted EPS | $0.89, versus $(0.61) | $0.51, versus $(0.43) |
| Operating cash flow | Not separately reported for the quarter | $(136.4) million, versus $(46.9) million |
| Capital expenditures | Not separately reported for the quarter | $124.8 million, versus $35.0 million |
Second-quarter revenue rose 108.3%, principally reflecting the acquired Alon operations and higher petroleum product prices and volumes. For the first half, revenue increased 103.8%. Management attributed improved refining results to the added Big Spring and Krotz Springs refineries, stronger crack spreads and RIN exemptions. Refining segment contribution margin was $177.0 million in Q2 (7.9% of refining revenue), versus $16.9 million; logistics contribution margin was $45.4 million versus $31.7 million. Retail contributed $18.6 million; there is no comparable 2017 retail segment because it entered the company through the Alon merger.
Balance sheet, debt and liquidity
At June 30, 2018, cash and cash equivalents were $1,132.8 million, total assets $6,211.8 million, and total stockholders’ equity $1,779.3 million. Total debt carrying value was approximately $2,042.5 million, up from $1,465.6 million at December 31, 2017; the company completed a refinancing during the period. Current liabilities were $2,161.4 million and current assets $2,949.3 million. Delek reported approximately $702.8 million of unused credit commitments or borrowing-base availability and $133.3 million of letters of credit outstanding. Management said it was in covenant compliance and expects available liquidity to cover operations and capital spending for at least the next 12 months.
Material changes, outlook and risks
- Operating cash use widened year over year, largely reflecting cash tied up in receivables, inventory and derivatives; working-capital movements were significant. Financing cash flow was positive $313.5 million, while investing cash flow was positive $13.8 million, including asset-sale proceeds.
- Delek refinanced debt on March 30, issuing a $700 million term loan and establishing a $1.0 billion asset-based revolver, while repaying various prior facilities. The first-half results include a $9.0 million debt-extinguishment loss and $27.5 million impairment of asphalt assets, partly offset by a $13.2 million gain on their sale.
- Delek sold asphalt assets for approximately $110.8 million net proceeds and sold Paramount/AltAir assets in March; Long Beach assets closed July 17 for initial proceeds of approximately $14.9 million. The California operations were reported as discontinued operations; their first-half loss, net of tax, was $9.0 million.
- Management forecast 2018 capital spending of $228.0 million, excluding approximately $75.7 million of planned Permian midstream projects. First-half spending was $124.8 million. The filing gives no earnings or revenue guidance.
- Commodity and refining-margin volatility, crude differentials, RIN costs, operating reliability, interest rates, counterparty exposure, regulation and seasonality are material risks. EPA small-refinery exemptions reduced first-half RIN costs by about $90.9 million; future volumes or costs are uncertain. The company also estimated $54.1 million of deferred commodity-hedge losses would be reclassified to cost of goods sold over the following 12 months.
- Environmental liabilities were approximately $143.3 million, with about $7.6 million expected to be spent within 12 months. A proposed Big Spring EPA consent decree was expected to require a $0.5 million penalty and potentially significant pollution-control spending over five years. A Magnolia pipeline-release lawsuit was filed in July 2018; Delek had accrued $1.0 million and said it believed the amount adequate. Management did not expect pending proceedings to have a material adverse effect.
- Tax accounting under the 2017 Tax Reform Act remained provisional; further guidance or interpretation could change tax expense. The board declared a $0.25-per-share quarterly dividend on August 7, payable September 4, 2018.
Important facts for investors to verify
- How much of the year-over-year earnings improvement reflects Alon consolidation, improved refining conditions and temporary RIN exemptions, rather than recurring comparable performance.
- Whether operating cash flow recovers as working-capital requirements and derivative balances change, and how planned capital expenditures affect liquidity.
- Debt maturities, borrowing availability, interest-rate sensitivity and compliance with facility covenants following the refinancing.
- The ultimate cost and timing of environmental remediation, the Big Spring consent decree and the Magnolia release litigation.
- The final proceeds and settlement adjustments for the California disposals, and the realized impact of hedge losses and provisional tax accounting.