Delek Logistics Partners (DKL) Q4 2024 Earnings Call Transcript

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Delek Logistics Partners (NYSE: DKL)
Q4 2024 Earnings Call
Feb 25, 2025, 12:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. My name is J.L, and I will be your conference operator today. At this time, I would like to welcome everyone to the DKL fourth quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question-and-answer session. [Operator instructions] I would now like to turn the conference over to Robert Wright, deputy CFO. You may begin.

Robert Wright -- Senior Vice President, Deputy Chief Financial Officer

Good morning, and welcome to the Delek Logistics Partners fourth quarter earnings conference call. Participants joining me on today's call will include Avigal Soreq, president; Reuven Spiegel, EVP; Mark Hobbs, EVP. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including statements regarding guidance and future business outlook. Any forward-looking statements made during today's call involve risks and uncertainties that may cause actual results to differ materially from today's comments.

Factors that could cause actual results to differ are included in our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal for opening remarks. Avigal?

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Avigal Soreq -- President

Thank you, Robert. Delek Logistics Partners had another record quarter. We reported approximately $107 million in quarterly adjusted EBITDA. 2024 has been a transformational year for Delek Logistics, and we are pleased with its continued, strong performance.

In 2024, DKL has taken key steps to becoming a premier, full-service, crude, natural gas, and water provider in the prolific Permian Basin, and we expect to make further progress in 2025. I would like to take a moment to reflect on the things we were able to accomplish in 2024. We increased the financial and trading liquidity of DKL. We were also the first MLP to do two primary offerings in a year since 2017.

We amend and extend contracts between DKL and DK for a period of up to seven years, providing certainty around cash flows. We completed the acquisition of Delek's portion in Wink to Webster pipeline, which increased the overall asset quality at DKL and enhanced DKL Permian position. We announced two acquisitions in the Midland Basin. H2O Midstream and Gravity Water Midstream enhance our competitive position in the Midland Basin significantly.

We are excited about our combined offering, and we are extremely pleased with the initial success we have seen so far. In the Delaware Basin, we are also making good progress in our processing plant expansion. The expansion is set to complete on time and on budget in the first half of 2025. As we complete the plant expansion, we also announced an FID on acid gas injection at the Libby complex.

AGI wells and sour gas treating capabilities enhance our competitive position in the Delaware and provide a good runway of growth for Delek Logistics in the future. Looking forward, in 2025, we'll continue to grow the partnership through prudent management of leverage and coverage. DKL also initiated a strong 2025 EBITDA guidance of $480 million to $520 million. This represents around 20% growth over 2024 adjusted EBITDA.

DKL continued to provide one of the best combination of yield and growth in the entire AMZI index. We'll continue to increase our economic separation with our sponsor, DK. We are progressing the economic separation in a few different ways. And today, we have announced an additional tool to enable the deconsolidation.

Our board of directors have authorized up to $150 million buyback from our sponsor, DK, to enhance value for the DKL unitholders. I'm also pleased to announce that the board of directors has approved the 48th consecutive increase in the quarterly distribution to $1.105 per unit. To conclude, we are very excited about the prospect of Delek Logistics. We expect to continue on our value-creation path moving forward, and we will continue to grow our distribution in the future.

I will now hand it over to Mark.

Mark Hobbs -- Executive Vice President, Corporate Development

Thank you. As Avigal mentioned, we are growing Delek Logistics with a prudent management of liquidity and leverage. We managed our financial liquidity throughout 2024 by accessing both the debt and equity markets. Post the close of our acquisition of Gravity Water Midstream, we have approximately $530 million of liquidity.

We are also managing our leverage as we complete several important organic growth projects this year. Moving on to our fourth quarter results. The fourth quarter adjusted EBITDA was $107.2 million, compared to $100.9 million in the same period of 2023. Distributable cash flow, as adjusted, was $69.5 million, and the DCF coverage ratio was approximately 1.2 times.

As mentioned previously, we expect this ratio to steadily move back to our long-term objective of 1.3 times in the second half of 2025. As for the gathering and processing segment, adjusted EBITDA for the quarter was $66 million, compared to $53.3 million in the fourth quarter of 2023. The increase was primarily due to higher throughput from Delek Logistics Permian Basin assets and contribution from H2O Midstream. Wholesale marketing and terminalling adjusted EBITDA was $21.2 million, compared to $28.4 million in the prior year.

The decrease was primarily due to lower wholesale margins and impact of intercompany transactions. Storage and transportation adjusted EBITDA in the quarter was $17.8 million, compared with $17.5 million in the fourth quarter of 2023. The increase was mainly driven by higher storage and transportation rates. And lastly, the investments in pipeline joint venture segment contributed $11.3 million this quarter, compared with $8.5 million in the fourth quarter of 2023.

The increase was primarily due to the contribution from the Wink to Webster drop-down in August of last year. Moving on to capital expenditures. The capital program for the fourth quarter was $49.4 million, of which $42.1 million was allocated to the new gas processing plant. The remainder of the spend in the quarter was for growth projects, namely advancing new connections in the Midland and Delaware gathering systems.

Along with initiating our full-year EBITDA guidance of approximately $500 million at the midpoint, we have also announced today our 2025 capital guidance. In 2025, we expect to spend a total of approximately $75 million on completing our Libby plant expansion and approximately $160 million on growth and maintenance projects. With that, we can open the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Doug Irwin of Citi. Your line is open.

Doug Irwin -- Citi -- Analyst

Hey.

Mark Hobbs -- Executive Vice President, Corporate Development

Good morning, Doug.

Doug Irwin -- Citi -- Analyst

Good morning. I just want to stay with the EBITDA guidance here. Just looking at some of the prior benchmarks you've put around the acquisitions and the process and plant expectations points to a relatively conservative guide, at least at the low end of the range. So I was just curious if you could maybe talk a little bit about what might drive the high end versus the low end here and then maybe kind of where you see yourself exiting the year given some of the moving pieces throughout.

Avigal Soreq -- President

Hey, Doug. Thanks for the question. And listen, that's the first time we're giving guidance. DKL, obviously, is a growing company as we demonstrated and as you can well -- very well see.

Obviously, we are increasing the economical separation between DK and DKL in every step that we are doing and for sure with the step that we announced today of the $150 million buyback from our sponsor. And we want to help you and others to model us better, and that's what we try to do today. We feel confident with the guidance we gave today. And obviously, we are looking forward to update you down the road.

If there is more modeling question, obviously, you can follow up with Mohit for more detailed questions how to get the exact model, but that's where we are today. And obviously, there is always opportunities in the future.

Doug Irwin -- Citi -- Analyst

Understood. Yeah. I appreciate the first-time guidance. Maybe a follow-up on the buyback program, maybe a two-part question here.

Just first, just curious how quickly you expect to be able to execute on that $150 million; and then second, just how you're thinking about funding these buybacks. Are you looking to potentially fund it all internally with free cash flow or you may be willing to use debt here given the discounted yield relative to where the equity is trading? And if so, just curious where you see leverage over the near term.

Avigal Soreq -- President

Yeah, absolutely. So if we're looking at it from a free cash flow standpoint, Doug, and I'm sure that you can appreciate it, our cost of capital on the debt side is around 7%. And what we see here today at $40 is close to 11%. So that's obviously very beneficial from a free cash flow standpoint for DKL, and that's something that our partnership liked a lot.

Also, you can, for sure, appreciate that the deconsolidation effort is an initiative for both companies, both DKL and DK, and the reason that it will allow DKL to completely fulfill its potential without sponsors. So those two initiatives are very well embedded in that. We are not going to give guidance, specific guidance. It's going to be subject to market condition and DKL offering that to DK, but that's something that we definitely look very close and working hard on that.

But I will let Reuven to chime in more on that and to give some more color.

Reuven Spiegel -- Executive Vice President, Chief Financial Officer

Well, just two bullet points. One, it's a two-year program, and we have to do -- execute that while complying with the company covenants and leverage ratio target. And obviously, that will be in place as long as the DKL share price makes sense from free cash flow accretive for the company.

Doug Irwin -- Citi -- Analyst

Understood. Thanks.

Reuven Spiegel -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Neal Dingmann of Truist Securities. Your line is open.

Neal Dingmann -- Analyst

Hey, good morning.

Avigal Soreq -- President

Good morning.

Neal Dingmann -- Analyst

Good morning. Thanks for the time, guys. My question, a little bit about the same. I'd love to see the guidance.

Obviously, looks great on EBITDA. I'm just wondering, besides you mentioned in release, it's nice to see the upside that's going to happen around the Libby plant expansion. Could you speak to and maybe -- just maybe other notable drivers you'd share with us that's driving this upside potential around the EBITDA you're showing this year?

Avigal Soreq -- President

Yes. So we have many chips in this guidance, right? We obviously finished the Gravity deal. We finished the H2O deal. We announced the Libby plant.

We announced the AGI and the sour effort. And obviously, there are synergies among all of that, and we have W2W. So there is really a mix of transactions that we have done. And we felt, Neal, that it's very much necessary to give you guys a clear guidance and making your life just a little bit easier in terms of where we land.

And I think it's very important to investors to see how much our currency is cheap versus the entire AMZI index and how good of a position it is. So I think that's the reason we decided to give that because of the amount of transaction we did and to reflect more how discounted we think our currency is. So that's the reason we did it, and I'm sure that you can appreciate it.

Neal Dingmann -- Analyst

I definitely appreciate that the discount is definitely -- obviously seen out there right now. And then just my follow-up would be on the key three bear assets years, which continue to be so good, just wondered how is -- when you look at those assets, just wondering how is demand and utilization of these assets looking.

Avigal Soreq -- President

Yeah. So we would not expand those assets if you wouldn't see a strong demand. Obviously, the gas in the Delaware area is -- looks very good. We have many discussions with our producer that we have accurate dedication with.

But another point I would like to highlight for you, Neal, is our comprehensive offering of crude, gas, and water, proved it very nicely in the Delaware, and that's part of the reasoning that we implemented the same concept also in the Midland Basin. So that's paying us dividends, and we are very happy about that. That's the reason we felt confident with Libby, too, or the expansion, and we went also to the sour. So we are -- we feel confident to our -- to the tactics and also to the strategy.

Neal Dingmann -- Analyst

Very good. Thank you.

Avigal Soreq -- President

You bet.

Operator

With no further questions, that concludes our Q&A session. I will now turn the conference back over to Avigal Soreq for closing remarks.

Avigal Soreq -- President

Yeah, absolutely. Thank you today. I would like to thank my colleagues around the table, I would like to thank the entire Delek Logistics employees, our board of directors, and for you, investors, and we'll meet again in the next quarter. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Robert Wright -- Senior Vice President, Deputy Chief Financial Officer

Avigal Soreq -- President

Mark Hobbs -- Executive Vice President, Corporate Development

Doug Irwin -- Citi -- Analyst

Reuven Spiegel -- Executive Vice President, Chief Financial Officer

Neal Dingmann -- Analyst

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