Delek US Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Amounts are in U.S. dollars unless stated otherwise. Delek is an integrated downstream energy company with refining, logistics and retail segments.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1,821.2 million | $2,199.9 million |
| Operating income (loss) | $(361.5) million | $222.4 million |
| Net income (loss) | $(307.0) million | $154.4 million |
| Net income (loss) attributable to Delek | $(314.4) million; $(4.28) per diluted share | $149.3 million; $1.90 per diluted share |
| Operating cash flow | $(154.1) million | $133.4 million |
| Capital spending | $190.2 million | $128.4 million |
| Cash and cash equivalents, period end | $784.9 million | $955.3 million at Dec. 31, 2019 |
| Total debt, period end | $2,216.9 million | $2,067.1 million at Dec. 31, 2019 |
Refining segment contribution margin was $(290.4) million, versus $301.9 million a year earlier. Logistics contribution margin rose to $47.3 million from $40.1 million; retail rose to $12.3 million from $10.2 million. Consolidated contribution margin was $(243.9) million versus $333.8 million. The filing does not provide a consolidated gross-margin percentage.
Current assets were $1,956.1 million and current liabilities were $1,626.9 million at March 31, 2020. Debt facilities had approximately $836.7 million of unused commitments or borrowing-base availability. Delek reported compliance with debt covenants at quarter end and expected to remain compliant, while noting that future operating conditions could affect liquidity and covenant compliance.
Material changes and drivers
- Revenue declined 17.2% year over year, reflecting lower refined-product prices and volumes, including Big Spring turnaround activity, and lower retail fuel and merchandise sales. Lower crude costs and higher hedge gains partly offset the impact on costs.
- The refining segment’s contribution margin swung from $301.9 million to a $290.4 million loss. Management cited weaker crack spreads and crude differentials, inventory valuation impacts, and reduced Big Spring throughput during turnaround activity.
- A $282.5 million pre-tax inventory valuation reserve was recorded at quarter end; $149.6 million related to LIFO inventory. The net increase in inventory valuation reserves added $280.8 million to cost of materials and other in Q1, compared with a $52.1 million reduction in that cost in Q1 2019.
- Operating cash flow fell by $287.5 million year over year to a $154.1 million use of cash. Investing used $146.6 million, including $189.2 million of property, plant and equipment purchases; financing provided $130.3 million, including net revolver proceeds.
- Debt increased $149.8 million from December 31, 2019. Interest expense rose to $36.3 million from $28.7 million, primarily due to higher average borrowings and a higher effective rate.
Outlook, risks and notable items
- COVID-19 restrictions sharply reduced travel, airline activity and fuel demand; the OPEC production dispute and Saudi price discounts intensified crude-price declines and volatility. Management said the future financial impact was uncertain and could be materially adverse. No earnings guidance was provided.
- Management said it was reviewing refinery throughput and maintenance plans, seeking storage, reducing planned capital spending, suspending share repurchases, reviewing dividend strategy, seeking financing alternatives and pursuing cost reductions. The filing’s 2020 capital-spending forecast was $250 million, but management said planned spending could be reduced; the forecast is subject to change.
- On May 4, the board declared a $0.31-per-share quarterly dividend, payable June 3, 2020. Management said it was reviewing dividend strategy in response to market conditions.
- In April 2020, the three J. Aron supply-and-offtake agreements were extended to December 30, 2022, with J. Aron holding an option to extend through May 30, 2025. On May 7, Delek sold its non-operating Bakersfield refinery for $40 million cash; the transaction occurred after quarter end.
- Environmental liabilities totaled approximately $144.5 million, with $8.2 million expected to be spent over the next 12 months and most of the balance by 2032, though some costs may extend up to 30 years. The company said pending proceedings were not expected to have a material adverse effect. It recorded $6.7 million of damages related to an easement dispute.
- A stockholder rights plan adopted in March may make an unsolicited change of control more difficult; rights generally become exercisable if a person or group reaches 15% ownership, subject to the plan’s terms. The plan was set to expire March 19, 2021 unless extended or ended earlier.
Most important facts for investors to verify
- How much of the Q1 loss reflects the inventory valuation reserve, and how quickly inventory values, refining margins and throughput recover.
- Subsequent-quarter cash flow, liquidity, revolving-credit availability and covenant headroom amid weak demand and volatile markets.
- Whether management reduces the stated $250 million 2020 capital-spending forecast, and the resulting effects on maintenance, turnarounds and growth projects.
- The effect of the amended J. Aron agreements, including their fees, commodity-price exposure and extension terms.
- Post-quarter results and proceeds from the Bakersfield sale, and any material changes in environmental, legal or other contingencies.
- Whether the $0.31 dividend is maintained and whether suspended share repurchases remain suspended.