Delek Logistics Partners, LP Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Delek Logistics First Quarter Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded today, May 6, 2020. I would now like to hand the conference over to your speaker today, Blake Fernandez. Blake, you may begin.

Thank you, and good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners’ first quarter 2020 financial results. Joining me on the call today will be Uzi Yemin, our general partner's Chairman and CEO; and Assi Ginzburg, CFO; Reuven Spiegel, incoming CFO, as well as other members of our management team. As a reminder, this call is being recorded and will make forward-looking statements as the term is defined under federal securities laws. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release posted on the Investor Relations section of our website. Our prepared remarks are being made assuming that the earnings press release has been reviewed and we are covering less segment and market information than incorporated in the first quarter press release. On today’s call, Assi will begin with a financial overview, I will review results, and Uzi will offer a few closing strategic remarks. With that, I’ll turn the call over to Assi.

Thanks Blake. Our first quarter performance on a year-over-year basis benefited from improved results from the Paline Pipeline, East Texas marketing, El Dorado assets, and our Gathering Assets. Our DCF was approximately $35.5 million in the first quarter 2020, compared to $29.8 million in the first quarter 2019. The Limited Partners’ interest in net income increased approximately 51% over the prior year period. Our DCF coverage, which was approximately 1.15 for the first quarter of 2020, compared to approximately 1.1 in the prior year period. EBITDA was $49 million, which represents a 23.5% increase over the prior year periods. Based on our performance and outlook, we increased our quarterly distribution to $0.89 per limited partner unit for the quarter ended March 31, 2020. This distribution will be paid on May 12 and represents a 0.6% increase from the fourth quarter 2019. This is our 29th consecutive quarterly increase and is 8.5% higher than our first quarter 2019 distribution. At March 31, 2020, and after completion of the DPG dropdown, DKL had approximately $155 million of available capacity on our $850 million credit facility. Our total debt was approximately $940 million and total leverage ratio of 4.1 times is within the 5.5 times currently allowable under our credit facility and a decrease from the 4.5 times leverage in the prior quarter. Now, I will turn over the call to Blake to discuss the results.

Thanks Assi. For the first quarter of 2020, Delek Logistics reported net income attributable to all partners of $27.8 million, as compared to $19.7 million in the prior year period. Limited Partners’ interest in net income in the fourth quarter was $18.7 million or $0.76 per unit, compared to $12.4 million or $0.51 per unit in the prior year, representing an approximate 51% increase year-over-year. In our pipelines and transportation segment, the first quarter of 2020 contribution margin was $30.4 million, compared to $24.2 million in the first quarter of 2019. This increase was primarily attributable to strong performance from our gathering assets and strong margins at the Paline Pipeline. Operating expenses increased to $11.5 million in the first quarter 2020 from $10.8 million and in our wholesale marketing and terminalling segment, our contribution margin was $17 million in the first quarter of this year, which is an increase from $15.9 million in the prior year. Operating expenses of $3.3 million were lower than the prior year period. Our West Texas wholesale gross margin was $2.70 a barrel in the first quarter, compared to $3.56 per barrel in the first quarter of the prior year. However, throughput in West Texas was up to 16,000 barrels per day, compared to 13,000 barrels per day in the prior year period. During the first quarter of 2020, our equity income from joint venture crude oil pipelines was approximately $5.6 million, compared to $2 million in the prior year period. Capital expenditures were approximately $3 million in the first quarter of 2020 and included $1.4 million of discretionary spending and $1.6 million of sustaining maintenance. For full-year 2020, our total gross capital expenditure forecast has been reduced from $22.7 million to $17.6 million, which includes $11.7 million of discretionary and $5.9 million of maintenance capital. With that, I’ll turn the call over to Uzi for his closing comments.

Thank you, Blake, and good morning everybody. Delek Logistics delivered strong financial performance in the first quarter with EBITDA and Limited Partners’ interest in net income increasing approximately 24% and 51%, respectively, versus last year. First quarter distribution growth was over 8.5% on a year-over-year basis. The recent acquisition of the Permian Gathering business from our sponsor DK is the next step in growth for DKL and is an integral part of our expanding midstream footprint. We expect increased cash flow generation in the second half of the year from the Red River path on expansion. We recently reiterated our expectation to increase the LP distribution by 5% this year, compared to 2019. This decision was based on our outlook for an improving distribution coverage ratio throughout the year, even after factoring in the distribution increase. We expect our coverage ratio to improve significantly toward the industry average as the year progresses and plan to use excess cash flow to reduce leverage over time and maintain strong financial flexibility. We also continue to explore potential dropdown opportunities from our sponsor DK, who has demonstrated strong support for DKL through attractive asset sales. Before I open the call for questions, I'd like to take a moment and thank Assi Ginzburg, our exiting CFO, for his service within our company for the last 15 years. Assi has demonstrated tremendous dedication and smartness, and his ability to help us lead DKL over the last few years has contributed significantly to its success. I would also like to welcome our new CFO, Reuven Spiegel, who I'm sure will do great for us. With that operator, please open the call for questions.

Thank you. Your first question comes from the line of Spiro Dounis.

Hi, good morning, everyone and congrats to Assi and Reuven. Just wanted to maybe get a better understanding of the impact to DKL for the rest of the year, when it comes to COVID demand impacts, as well as some of the lower drilling activity and the impact on West Texas volumes. Uzi, can you just talk about improving the coverage ratio? So, just looking for you to marry that comment with the current headwinds and just how you're thinking about the timing of when distribution coverage really starts to pull away?

Well, good morning. Your question has several components that we would like to answer this morning. First of all, the macro environment, even though it's not comfortable for the industry, actually DKL is more than thriving in that environment, especially in light of the fact that we still have several projects that will come to fruition over the next few quarters. Our goal, and we said it very strongly, is to get towards the industry average, both on coverage as well as leverage, and we hope that together with a couple of ideas that we have around drop-down, as well as investments that we have done in our assets that will come to fruition over the next few quarters, both the coverage and the leverage will improve significantly over the next few quarters. I just want to say that we would not have raised the dividend had we not seen internally how good the leverage and the coverage can be toward the end of the year.

Okay, I’d like to...

Yes, I would just add to you, with the drop, you're going to have about 75% to 85% MVC’s underpinned by Delek, who's obviously our strong sponsor, so that obviously helps lock in a lot of that EBITDA.

Yes, no, that's a good point. And then just on the West Texas volumes, I guess, hearing about some pretty significant shut-ins in the Permian so far hitting in May, just curious if you guys have started to see some of that run off yet on the volumes there?

Hi, Spiro. Good morning, it’s Spiegel. So, we have seen some decline in demand in West Texas during the month of April, but in the last two weeks or so we've seen demand starting to pick back up and now we are around 15% more or less from what we see, what we consider average demand for the area. So, obviously, there was a bigger decline now in a nice return, like we’ve seen across the U.S.

Okay. Good to know. And just last one from me, some of your peers have talked about the limited opportunities in midstream to invest here, not necessarily something new; they've been sort of saying that for the last quarter or two, but now a little more firm than ever. You guys have always been able to really find places to grow. You obviously mentioned the drop-downs, which is curious if you see opportunities, even in this market to grow organically, and maybe augment that mission and strategy for the new state of energy here.

Well, we said all day long that our goal is to be around between $375 million and $395 million of EBITDA over the next two to three years. The drop-down of the midstream or the gathering system is another step. We do have a few more ideas about drop-down businesses that we have grown over the years that fit midstream. Don't be surprised if we come up with a couple of these ideas in the near future; I know that the market really likes the valuation where the drop-down happened. We believe that shows both DK and DKL have reflected in the conflict committee. So, with the things that are happening, we're still confident that we can work out the $400 million mark of EBITDA over the next two to three years.

Great. That's it for me. Thanks, everyone.

Your next question comes from a line of Ned Baramov.

The question, could you maybe elaborate a little bit more on the potential timing of future drop-downs and whether such a transaction would have the same contractual protection in the form of take-or-pay provisions as seen in the last drop-down?

We're looking into that. Don't be surprised if it's going to happen over the next or in the near future. We still need to look at the tax consequences of a drop-down. I'm going to remind you that there was no tax or no meaningful tax leakage when we did the drop-down of the gathering, which was a great achievement. We did it with great timing. So, we still need to look at that. We don't want any tax leakage, as well as the conflict committee to approve these transactions, but we're looking at that very carefully. As we said, we want to be close to $400 million EBITDA with industry average both on coverage and leverage, and we believe that this is another tool in our toolbox to get us towards these goals.

Great. And then on the potential IDR elimination, are you still thinking of this transaction as part of a drop-down deal?

The IVR transaction needs to make sense both for DK and DKL, especially in today's market. It's not a transaction that was straightforward a few months ago. We will need to look at returns on both ends and to make sure that it makes sense for both companies. That’s not an easy transaction at this point, but we are looking at that almost every week.

Got you. And then last question for me. Strong margins on the Paline Pipeline were one of the drivers behind your Q1 results, could you maybe provide additional details on the throughput and fees you're seeing on the pipeline?

Good morning. It’s Spiegel. So, Paline, if you are looking at that now and you're looking at the grade around the U.S., obviously, cushion is the lowest grade on the board. We are about to finish the expansion on Red River somewhere around Q3. So, if you are putting one plus one together you see a very bright future for Paline. So, you can use the expansion that we are finishing in Q3 with our partner plans and to put the two together, which will serve Paline very nicely in the future.

Got it. Thank you.

We have no further questions at this time. I'll turn it back over to your presenters for any closing remarks.

I'd like to thank everybody, especially in these challenging times, for your confidence in us. I'd like to thank our employees for their dedication, hard work, and for them staying healthy. I'd like to thank my colleagues around the table and the management team. Also, I'd like to thank obviously, the Board of Directors and the new investors for your confidence in us. Thanks and we'll talk to you soon.

Thank you for participating in today's conference call. You may now disconnect.