Delek US Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results are compared with 2021 figures retrospectively adjusted for the change from LIFO to FIFO inventory accounting.
Business context and results
Delek operates refining, logistics and retail businesses. Management attributed the improvement in results to unusually strong refining crack spreads, higher refinery utilization and product prices, and improved operating conditions compared with 2021. Refinery utilization rose to 97.6% in Q2 2022 from 88.5% a year earlier; six-month utilization was 93.9% versus 73.0%.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $5,982.6 million | $2,191.5 million | $10,441.7 million | $4,583.7 million |
| Operating income (loss) | $493.3 million | $(50.2) million | $540.0 million | $(97.6) million |
| Net income (loss) attributable to Delek | $361.8 million | $(56.7) million | $368.4 million | $(126.7) million |
| Diluted EPS | $5.05 | $(0.77) | $5.07 | $(1.72) |
| Cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $585.9 million | $134.9 million |
Q2 refining contribution margin increased to $618.3 million from $14.1 million; logistics contribution margin was $69.3 million versus $64.2 million. Retail contribution margin declined to $18.2 million from $21.9 million, as lower fuel margin per gallon offset higher fuel volumes. Six-month refining, logistics and retail contribution margins were $715.2 million, $131.6 million and $32.0 million, respectively.
Liquidity, debt and investment
- At June 30, cash and cash equivalents were $1,244.6 million, total current assets $4,557.4 million and current liabilities $4,229.1 million.
- Reported long-term debt and notes payable totaled $2,817.7 million before the current portion; principal borrowings were approximately $2,843.4 million. Total liquidity was reported at approximately $2.0 billion, including cash and $755.2 million of unused revolving commitments.
- Six-month investing cash outflow was $720.9 million, including $621.7 million for the 3 Bear acquisition. Capital spending was $93.3 million; full-year 2022 capital spending was forecast at $292.3 million.
- Current obligations included $770.5 million under J. Aron supply-and-offtake arrangements, with $537.4 million of baseline step-out liabilities and $233.1 million of revolving over/short inventory financing. The filing states $537.4 million is due December 30, 2022; management expected supply-and-offtake obligations to be refinanced.
Material changes, outlook and risks
- Revenue rose 173.0% in Q2 and 127.8% for the first six months year over year. Management cited strong demand against constrained supply and sharply higher benchmark crack spreads. Higher crude, operating, labor and energy costs and interest expense partly offset the improvement.
- Delek Logistics completed the $624.4 million preliminary-price 3 Bear acquisition on June 1. The acquired business contributed $20.6 million of revenue and $1.5 million of net income in June. Management expected the acquisition to be immediately accretive, but integration and benefit realization are risks; purchase accounting remains preliminary.
- Management planned to run refineries at or near nameplate capacity, integrate 3 Bear and balance debt and equity costs. It declared a $0.20-per-share special dividend paid in July and, after quarter-end, reinstated a $0.20 quarterly dividend and increased share-repurchase authorization to $400 million. Management expected $25–$35 million of repurchases in Q3 2022.
- Management cited recession and demand uncertainty, inflation and rising interest rates, crude/product price and crack-spread volatility, supply-chain and operating disruptions, and Russia-Ukraine-related uncertainty. EPA renewable fuel obligations and RIN price volatility were significant risks; Delek challenged denial of its 2018, 2019 and 2020 small-refinery exemption applications.
- Recorded environmental liabilities were approximately $115.4 million. The filing describes ongoing environmental and regulatory exposure, including uncertainty around remediation and a disputed terminal-related matter. Delek reported that it was in compliance with debt covenants at June 30, 2022.
- The Tyler refinery inventory accounting change from LIFO to FIFO was applied retrospectively. FIFO increased reported Delek-attributable income by $34.3 million in Q2 and $131.1 million for the first six months of 2022 compared with LIFO calculations; the change also reduced June 30 inventory by $230.7 million relative to LIFO.
Important facts for investors to verify
- How much of the exceptional refining profitability and utilization can persist if crack spreads, demand or crude differentials weaken?
- Whether 3 Bear delivers expected cash flows and synergies, and how final purchase-price allocation or integration costs change reported results.
- Near-term refinancing and repayment plans for the J. Aron obligations and product-financing liabilities, alongside debt maturities, floating-rate exposure and covenant headroom.
- The cash impact of RIN obligations, EPA exemption litigation and any resulting penalties or changes in compliance costs.
- Whether dividends, planned repurchases and the $292.3 million capital budget remain supportable under changing market and liquidity conditions.