Delek Logistics Partners, LP Q4 FY2022 Earnings Call

Good day, and welcome to the Delek Logistics Partners Fourth Quarter 2022 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Rosy Zuklic, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to the Delek Logistics Partners Fourth Quarter Earnings Conference Call. Participants on today's call will include Avigal Soreq, President; Todd O'Malley, EVP and Chief Operating Officer; Reuven Spiegel, EVP and Chief Financial Officer; as well as other management team members. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including without limitation, statements regarding guidance and future business outlook. These statements involve risks and uncertainties that may cause actual results to differ from our forecast. For more information, please refer to the risk factors discussed in the company's most recently filed annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC, along with the press release associated with this call. The company assumes no obligation to update any forward-looking statements or information, which speak as of their prospective date. I'll now turn the call over to Avigal for opening remarks.

Thanks, Rosy. Delek Logistics Partners ended the year with record growth. Our logistics system ended extremely well this quarter, contributing to a record EBITDA of $92.5 million, 33% higher than before. A big driver for the increase was the successful integration of the 3 Bear asset. We are very pleased with the integration of 3 Bear and consider the integration phase complete. Their logistics had a safe and reliable operation all year long. This was a direct result of dedicated employees and contractors. We achieved 3 million man hours worked without a lost time injury, a great milestone we aim to continue. Our Board approved an increase in the quarterly distribution to $1.02 per unit for the fourth quarter. This marks 40 consecutive quarterly distribution increases. We successfully achieved our goal to deliver a 5% distribution increase in 2022 and expect to continue this trend into 2023. From a macro perspective, we are optimistic about the outlook for the midstream business. Delek Logistics is well positioned to continue its strong track record to grow and to be a long-term significant midstream player. I will now hand it over to Todd.

Thanks, Avigal. Starting this quarter, we changed our reporting segments to better align our financial reporting with how we manage the business. The change primarily centered around reporting the results from our Delek Permian gathering system and 3 Bear assets in one new segment called Gathering and Processing. Total EBITDA per DKL was $92.5 million for the fourth quarter of '22 compared with $70 million for the same period of 2021. The fourth quarter of 2022, distributable cash flow was $51 million, and the DCF coverage ratio was 1.16x. For the Gathering and Processing segment, EBITDA this quarter was $48 million compared with $34 million in the fourth quarter of '21. The increase was primarily driven by strong contributions from the Delek Permian Gathering System as well as the 3 Bear assets. The Wholesale Marketing and Terminalling segment contributed $23 million of EBITDA this fourth quarter compared with $19 million in the same period last year. The main driver for the increase year-over-year was due to our West Texas Wholesale business. The Storage and Transportation segment had EBITDA of $16 million this fourth quarter, in line with the fourth quarter of '21. Lastly, the investments in the Pipeline Joint Venture segment contributed $9 million towards the fourth quarter of '22 compared with $7 million in the fourth quarter of '21, primarily due to increased volumes at the Red River and Caddo joint ventures. Moving to capital expenditures, for the full year of '22, we spent $131 million, excluding the 3 Bear acquisition, of which $120 million was earmarked for growth. For 2023, we have a capital budget of $81 million, of which $66 million is earmarked for growth. With that, operator, we can open the call for questions.

Our first question comes from Doug Irwin from Citi.

Just wanted to start with the '23 outlook and the Permian G&P segment. As you've already achieved the prior target of doubling the legacy Permian volumes, I'm just curious what your expectations are around volume growth moving forward from here. And then on 3 Bear, I'm curious if you're able to provide an update around where those assets are trending relative to the $100 million EBITDA that was implied by the initial valuation multiple.

Yes, Doug, it's Avigal. Good afternoon, thank you for joining us today. So the DPG is an extremely good asset. We are very pleased with what we are seeing. I'm not going to give you a specific number for 2023, but I will provide you some highlights around the assets. We do have 325,000 acres and a line in sight for more. Organically, we see an increase, just talking to producers at a very nice percentage, which will exceed what the rest of the Permian sees. We have 25 rigs on that acreage, which is a prolific number compared to the rest of the basin. We expect it to show very nice growth, well exceeding the average of the market during the rest of the year. Probably in the first quarter, we'll be able to give you more specific numbers around the growth. That asset and the rock are performing extremely well, and we are very fortunate to have that asset and that investment. Around 3 Bear, the script was very clear. We have seen the integration phase complete. We actually changed the name to Delaware Gathering System to reflect that completion of the integration. We are well positioned to continue the trend to hit our target. So that is as straightforward as it could be.

Great. That's helpful detail. Then as my second question, I was just wondering if you could talk about how you're thinking about the general partner, kind of in the context of the sum of the parts review at the DK level. So the GP structure is something that you view as an obstacle to potentially being able to deconsolidate the detailed debt on the balance sheet. And if so, could you maybe talk about some of the different options that are out there to potentially address that?

Yes. So let's be clear, first, every deal that we might put together is, first and foremost, to the benefit of the unitholders. We are very proud of having 40 quarters where we increased distribution consistently. We take a great deal of pride in our ability to serve our unitholders. So we will start with that consideration first, determining what's the right thing to do for the investment community. Then we'll understand what is the right thing to do for the business. I'm sure that when there's an opportunity, we'll lead the way and structure the right deal and the right corporate governance to allow us to execute the best deal for the investors and for the company.

Got it.

Thank you for joining us today.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Avigal Soreq for any closing remarks.

Yes. So first of all, I want to thank the management team around the table for working hard to make the partnership as good as it can be and to thank the Board of Directors for their support and the investor community for trusting in our performance. And first and foremost, to our dedicated employees who are working day and night, in rain and sunny days, thank you so much.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.