Earnings Call Transcript - DKL Q4 2021

Operator, Operator

Good day, and welcome to the Delek Logistics Fourth Quarter 2021 Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Blake Fernandez. Please go ahead.

Blake Fernandez, General Partner Chairman

Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners' fourth quarter '21 financial results. Joining me on today's call will be Uzi Yemin, our General Partner's Chairman and CEO; and Reuven Spiegel, CFO; as well as other members of the management team. As a reminder, this conference call may contain forward-looking statements as that 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 website. Our prepared remarks are being assumed that the earnings press release has been reviewed, and we are covering less segment and market information than is incorporated into the press release. On today's call, Reuven will begin with financial overview, I will review results, and Uzi will offer a few closing strategic remarks. With that, I'll turn the call over to Reuven.

Reuven Spiegel, CFO

Thank you, Blake. Our distributable cash flow was approximately $54 million in the fourth quarter compared to $56 million in the fourth quarter of 2020. Our DCF coverage ratio was 1.27x for the fourth quarter compared to 1.41x in the prior year period. EBITDA was $70 million, which represents a 9% increase over the prior year period. Our Board approved an increase in the quarterly distribution to $0.975 per limited partner unit for the quarter ended December 31. This distribution was paid on February 8, to the unitholders of record on February 1 and represents a 2.6% increase from the third quarter and a 7.1% increase from the fourth quarter of 2020. At December 31, 2021, DKL had $592 million of available capacity on our $850 million credit facility. Our total debt was $899 million and total leverage ratio is 3.35x, which is well within the 5.25x currently allowable under our credit facility. Now, I will turn the call over to Blake to discuss the results.

Blake Fernandez, General Partner Chairman

Thanks, Reuven. In our Pipelines and Transportation segment, the fourth quarter '21 contribution margin was $50 million compared to $44 million in the fourth quarter of 2020. The increase was primarily attributable to higher pipeline throughput, partially offset by expenses related to pipeline integrity work. In our Wholesale Marketing and Terminalling segment, contribution margin was $17 million in the fourth quarter of this year compared to $18 million in the fourth quarter of 2020. Results were broadly in line with year-ago levels. During the fourth quarter of '21, equity income from our crude oil pipeline JVs was approximately $7 million compared to $6 million in the prior year. Capital expenditures were approximately $12.9 million in the fourth quarter of '21, which consisted of $8.2 million of growth spending and $4.8 million of sustaining maintenance. On a full year basis, our '21 total gross capital expenditure was $27.5 million, which includes $20.2 million of growth and $7.3 million of maintenance capital. The outlook for '22 includes total gross capital expenditures of $70.8 million, including $59 million of growth and $11.8 million of maintenance capital. With that, I will turn the call over to Uzi.

Uzi Yemin, CEO

Thank you, Blake, and good morning, everybody. DKL delivered another strong performance in 2021, despite operational downtime at multiple Delek U.S. facilities during the year. The lack of major planned turnaround activity for Delek System in 2022 will benefit DKL with strong volumes flowing towards our assets this year. Permian activity is once again accelerating and DKL is poised to benefit with increased demand in our gathering system. We plan to expand this asset with a step-up in growth capital in 2022. We delivered on our 5% distribution growth commitment for 2021 with the recent quarterly distribution increase. We expect another 5% increase in 2022 on a full year basis. With that, operator, can you please open the call for questions?

Operator, Operator

And the first question will come from Spiro Dounis with Credit Suisse.

Spiro Dounis, Analyst

First question on growth CapEx. Uzi, you just mentioned it, the $59 million. It sounds like a lot of that's going to be directed towards the Permian gathering system. Can you give us a sense maybe for what else is actually in that number? Is that really all directed there? And then just as you think about the commodity environment, I think that guidance came out in December, commodity obviously vastly improved even since then. And so, curious if you see any sort of upside skew or bias to that number as the year progresses?

Uzi Yemin, CEO

Good morning, Spiro. The $59 million figure is primarily allocated to the DPG, with only a few exceptions. In the Permian, we are focused on existing producers who have shared their plans with us, and we will support them as per our agreements. We anticipate new producers entering the market, which could increase that number due to current developments. However, we need to keep in mind that with involvement at $100, $90, or $80, the gathering spreads are aligning well. We are successfully meeting our 15% to 17% threshold. To provide some context, it’s challenging to predict production for 2022. Until about a week ago, we observed that we were gathering 83,000 barrels in the fourth quarter. We are currently trucking about 125,000 barrels as we build out our infrastructure. By the end of the year, as of 10 days ago, we expect to double the 83,000 figure, surpassing 160,000 barrels as we exit 2022. Essentially, our goal was to double production within the year until recent updates.

Spiro Dounis, Analyst

Wow. Okay. That's helpful color, thanks, Uzi. Second question, just going to something from the DK press release. It talked a little bit about some opportunistic divestitures of the DKL stock that probably continue to happen just given the success of that program so far. I guess just curious, is there a target ownership level that you all have in mind at DK? Really just any color there on how you're thinking about executing these divestitures would be helpful.

Uzi Yemin, CEO

Well, we said that $43, $44 is a good number. We obviously have limits to the downside if something happens to the unit. But so far, it's holding okay. I think we actually have an upside based on today's numbers and the color we're providing both on the DPG thing and also the Slurry Project. So we will continue to do that. We don't think that we should be holding 79%, 80%. We'll do that in a timely manner. You probably saw the press release. There's no need for cash over there. As a matter of fact, prices of crude are going up, so working capital will continue to be very positive for DK. So we'll do that as long as we think there's value in it. But certainly, we don't think that 80% is the right number. And I don't see us going out with big blocks anytime soon. We'll just do it in a timely manner under the ATM program.

Spiro Dounis, Analyst

Got it. Okay. That's helpful. Last one, if I could sneak it in. Just with respect to some of the customer contracts. It looks like you had a few expire in November in Greenville. I think there's a few more coming up in April at Big Springs. Just looking for any color you can provide in terms of how to think about the impact, the renewal process and anything you can share on those?

Blake Fernandez, General Partner Chairman

Sure, Spiro. So basically, all those contracts are going to be renewed and working towards also our conflict committee between both DK and DKL. We don't expect to have really an impact either from the associated volume that we are seeing over there and also from the CP standpoint. So really, we don't see any impact going forward for those two.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Uzi Yemin for any closing remarks. Please go ahead, sir.

Uzi Yemin, CEO

Okay. Thank you so much. I'd like to thank my colleagues around the table. I'd like to thank the Board of Directors and you, investors and analysts, for your interest in our company. This was a unique year for DKL. We actually have performed very well in the stock market. But at the same time, we also build the foundation for our future growth. I think the price of crude and what the things that are happening in the energy sector, especially in the Permian, should benefit us. And mostly, I'd like to thank each one of the employees of this great company. Have a great day, and we'll talk to you soon. Thank you.

Operator, Operator

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