Delek US Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Delek is an integrated downstream energy company operating refining, logistics and retail businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $2,062.9 | $2,334.3 | $5,419.6 | $7,014.5 |
| Operating income (loss) | $(75.2) | $87.4 | $(413.9) | $444.1 |
| Net income (loss) attributable to Delek | $(88.1) | $51.3 | $(314.8) | $277.9 |
| Basic earnings (loss) per share | $(1.20) | $0.68 | $(4.28) | $3.63 |
| Refining segment contribution margin | $(17.8) | $150.1 | $(248.5) | $650.1 |
| Logistics segment contribution margin | $67.2 | $46.6 | $175.9 | $130.9 |
| Retail segment contribution margin | $18.3 | $18.6 | $54.9 | $46.4 |
Refining margin, a company-defined non-GAAP measure, was $84.3 million in Q3 versus $270.8 million a year earlier, and $54.0 million for the nine months versus $1,006.8 million. Q3 consolidated operating margin was negative; the filing does not present a single consolidated gross-margin percentage.
- Cash flow: Operating activities used $399.8 million in the first nine months, compared with $448.4 million provided in 2019. Investing used $163.0 million; financing provided $415.4 million. Cash fell by $147.4 million to $807.9 million.
- Liquidity and debt: September 30 cash was $807.9 million. Reported borrowings were $2,474.0 million, compared with $2,067.1 million at year-end 2019. The company reported approximately $752 million of unused availability under revolving facilities and $227.3 million of outstanding letters of credit. Separate J. Aron supply-and-offtake obligations totaled $323.2 million.
- Balance sheet: Total assets were $6,525.0 million and stockholders’ equity was $1,420.3 million. Current assets were $2,514.5 million and current liabilities were $1,814.2 million.
- Dividends: Delek declared $0.31 per share for Q3. After quarter-end, it announced suspension of dividends beginning in Q4 2020 to conserve capital.
Changes versus the comparable period
- Q3 revenue declined 11.6% year over year; nine-month revenue fell 22.7%. Delek reported losses in both 2020 periods versus profits in 2019.
- Management attributed the deterioration chiefly to COVID-19-related demand weakness, lower refined-product prices and substantially weaker refining crack spreads. Management said Q3 crack spreads were approximately 53%–71% lower on average than a year earlier.
- Q3 refining margin contracted 68.9%; the nine-month measure fell 94.6%. Refining segment contribution margin turned negative. Logistics contribution margin increased, helped by the Big Spring Gathering System and trucking acquisitions and lower expenses. Retail contribution margin was nearly flat in Q3 and higher year to date, supported by improved fuel margins and merchandise sales despite lower fuel volumes.
- Retail same-store fuel gallons sold fell 18.8% in Q3 and 15.6% for the nine months; same-store merchandise sales rose 8.7% and 8.8%, respectively.
- Cash from operations swung from positive to negative. Debt increased, while the company reduced capital spending and nearly halted share repurchases.
Outlook, management commentary and risks
- Management described continued uncertainty from the pandemic, renewed restrictions, oil-market supply and demand, and OPEC+ production decisions. It warned that weak demand, product prices and crack spreads could continue to pressure earnings, liquidity and asset values.
- Delek reduced its 2020 capital spending forecast to $248.7 million from its prior $325.7 million forecast; it had spent $208.0 million through September. Management said it might revise the forecast further.
- Management planned to optimize operations at the Krotz Springs refinery after pulling forward unit work, including the option to run only units with favorable margins or return to full utilization if market conditions improve. It also described a 2021 cost-reduction plan, including workforce reductions and lower contractor and maintenance spending; expected savings were not quantified.
- The company recorded a $67.5 million inventory valuation reserve at September 30, including $65.0 million related to LIFO inventory. Nine-month results also included $65.6 million of net inventory valuation expense and $74.2 million of net losses on commodity derivatives and hedging instruments, as presented in the filing.
- The May sale of the non-operating Bakersfield refinery generated $40.0 million cash proceeds and a $56.8 million gain, largely because the buyer assumed substantially all associated asset-retirement and environmental liabilities.
- COVID-19 conditions prompted interim goodwill testing. No impairment was recorded at September 30, but Big Spring and Krotz Springs goodwill reporting units had estimated fair values less than 10% above carrying value; management cautioned that further deterioration could result in a potentially material future impairment.
- Environmental liabilities were approximately $112.7 million, with about $6.6 million expected to be spent in the next 12 months. Management reported no material releases during the nine months and did not believe pending litigation would materially affect the company.
- An October 1 J. Aron periodic price adjustment triggered a $20.8 million payment, made October 30; J. Aron separately refunded $10.0 million of deferred monthly fees. Delek reported compliance with debt covenants at September 30 but warned worsening conditions could affect covenant compliance and financing access.
Most important facts for investors to verify
- Whether refining margins, utilization and product demand recover, and whether the planned Krotz Springs operating changes and cost reductions are achieved.
- Cash generation, debt and revolving-facility availability, covenant headroom, and timing of the expected $165.6 million federal tax refund related to NOL carrybacks.
- Future inventory and derivative valuation effects, and potential cash settlements under the J. Aron agreements at subsequent repricing dates.
- Whether the narrow goodwill valuation cushions at Big Spring and Krotz Springs lead to impairment as market assumptions change.
- How long dividends remain suspended and whether the reduced 2020 capital-spending forecast or other capital-allocation plans change.