Unlock of SOTP Value: 100% Upside
This case was published on VIC in February and recently moved to the public domain (free registration on VIC is necessary to access the write-up). Since then, company’s share price has trended lower and management keeps on reiterating their determination to unlock the SOTP value of the business. Delek US Holdings operates 4 refineries and owns a small retail convenience store/gas station business. Besides that, the company also owns around 79% of publicly listed DKL, which is DK’s MLP engaged in midstream/pipeline services. Currently, DKL stake alone is worth $25.1 per DK share, which is more than the $23.6/share price of DK itself. Meanwhile, DK’s operating businesses – refinery and retail – are worth another $25-$30/share combined. The upside to SOTP valuation is 100%+. Management is well aware of this disconnect and, since the new CEO came on board last year, has been vocally communicating their intention to unlock the value (e.g. 3rd and 5th slide in Sep’22 presentation). This month, management has even added their own SOTP table to updated investor presentation, showing full DK valuation at $47.38-$56.14/share.
Management has not outlined any particular plans yet, however, the intent here seems to be the deconsolidation of DK in a tax-efficient manner. Reading between the lines of management’s comments in the last conf. call, it looks like a full sale of DKL is also among the considered options. Management mentioned looking into how to avoid contractually overburdening the standalone refining business, which is a major customer of DKL.
Absolutely. Doug, we’re taking everything into account as we think about how the chess pieces can move around. I mean clearly, we have very strong advisers that are helping us think through, what are the tax implications of different avenues that we can take. We obviously were a drop-down story. And we need to think about if we do go down a path that ultimately results in any sort of a deconsolidation, kind of what does the stand-alone refining company look like, make sure that it’s not overburdened contractually, supporting a midstream company that we now, in that scenario, don’t necessarily control and have potentially a smaller ownership. So we’re taking all those things in…
So far management has been unwilling to commit to any specific timeline, but this sort of strategic review has already been in process for a few quarters and the recent update of the investor’s deck with the SOTP table suggests that things are moving in the right direction.
I mean a lot of the things that we are considering basically will run their course on their own time frame. And so we’d like to be back to everyone as soon as possible because we’re more realistic about it. Our CEO has been talking about this for some time now. So we realized that there were some expectations even on our call earlier this week, where we would come out and be a lot more direct and what we’re intending to do, and we’re just not in a position to do that. So I don’t really want to get ahead of ourselves and commit to a time line, but I can tell you that we’re focused on it. We’re working hard on it, and we hope to be back before too long on what we intend to do, what we’re going to do.
At the end of March, DK has replaced two senior managers – COO and the president of the refining business. Potentially a sign of progress with the value unlock plan.
Hedging of DLK exposure is not really possible due to low float, limited trading liquidity, and very tight borrow availability. However, DKL seems to trade at similar levels to peers (more info below), whereas the potential upside and margin of safety seem sufficient to play this on the long side only.
Below I provide some quick background info on the individual parts of the SOTP calculations.
Refinery
DK owns 4 refineries in Texas. Refineries are facilities that process crude oil into finished products like gasoline, diesel and jet fuel. The most common proxy to track the industry’s profitability is ‘crack spreads’. Crack spread is basically the gross processing margin, the difference between the price of processed products (output) and the price of crude oil (input). The business is highly cyclical and sensitive to commodity price fluctuations. 2022 was a record-breaking year for the whole sector in terms of profitability due to several developments (Ukraine war, European gas crisis, decreased Chinese fuel exports etc.) that made crack spreads soar from a mid-cycle $20/bbl levels to $40-$60/bbl. DK’s refinery segment posted adj. EBITDA of $1188m, which after total overheads (using the same manner of calculations made in SOTP table above) would amount to $923m. For the context, the refining segment operates with about $200m-$250m of maintenance capex, so the business did generate very substantial cash flows last year. The company used a large part of this to repurchase 10% of shares at an average price of $25/share and plans to buy up to another 6% of shares in 2023.
The industry has already started normalizing and crack spreads have come down from peak levels to around $30/bbl today. Crack spread futures show that the market will continue to normalize with spreads expected to settle closer to mid-cycle levels of $20/bbl in the second half of 2023.
Worth noting that the 2023E refining segment EBITDA of $504m included in the SOTP slide is analysts’ consensus rather than guidance by management. However, this figure closely ties in with VIC author‘s mid-cycle EBITDA estimate ($715m-$750m) after the deduction of corporate overheads (around $250m).
Retail
DK’s retail business owns approximately 250 convenience store/gas station locations in West Texas and New Mexico. Management has been building the stores at around 4x-5x EBITDA multiple (Sep’22 presentation) and is now looking to sell the whole thing for 9x-11x EBITDA multiple. I think the lower end of the range is probably a more likely scenario here, given that a close but way larger peer CASY ($8.3bn market cap) trades at 10x TTM adj. EBITDA multiple.
Analyst consensus for DK’s retail 2023E EBITDA is $49m vs 2022 retail segment level EBITDA of $44m.
Delek Logistics (DKL)
DKL owns around 2k miles of pipelines in Texas. DK is DLK’s general partner and the largest customer accounting for 46% of sales in 2022. DKL has been growing mostly through acquisitions and asset drop-downs with EBITDA expanding at 18% CAGR from 2016 to 2022. The business is exposed to cyclicality, however, the revenue stream is somewhat protected by multi-year contracts with minimum volume/throughput clauses.
DKL appears to be valued rather in line with peers both on EV/EBITDA and dividend yield basis (see charts below). However, in the SoTP calculations above, management has included a 20% illiquidity discount for DK’s stake, probably to account for the fact that realizing the full value of a controlling stake in an illiquid MLP with one dominant customer (stake seller) won’t be that easy.
I can’t think of an event driven opportunity with more going for it in terms of the value (freeish net of DKL) and the event trajectory (management indicating imminent value unlocking). And it is 9% cheaper than it was at the beginning of the year. Would be grateful to hear the bear thesis from here. It is one of my largest and favorite longs for reasons expressed well above.
The financials and debt aren’t that exciting The argument is more the sum of the parts. I am debating what to do with this one. You would think it would show more net profit (and not this adjusted EBDITA)
The SOTP is no doubt juicy, but… They spend at least 200 in central costs + 200m in interest + 300 in Capex = 700m! You really need Refining to do very well in order to generate any FCF! Alternatively you need an activist who unlocks the value in a short time.
Thanks for posting, interesting idea. One question;
Corporate/other “segment EBITDA” has loss has increased a lot from 2021 to 2022 (147 MM to current 265 MM). Any insight into the reasons for the increase?
Tried scanning through the 10-K, but didn’t find any immediate answers. G&A is also up a lot from ’21, with noted reason being increased costs related to employees after DKL acquired 3Bear (but I guess this shouldn’t appear under corporate segment EBITDA?)
I’m just worried that DKL’s PB is negative even though it’s compirable company’s PB are about 1.8. What do you think about this?
I do not think BV is very relevant here. DKL is an income vehicle and not a balance sheet liquidation story. Negative BV is likely to be a result of some accounting peculiarities (e.g. depreciation of dropped-down assets and etc).
A quarter billion $ a year in overhead seems really excessive. What the hell are they spending that on?
And ETRN/EQT can be an instructive case here. ETRN held most of its margins after EQT sold most of its stake in its midstream business. So probably no more than a 10-20% drop in EBIT would be conservative enough if rates were renegotiated after a sale?
Management got a similar question during the Q4 conference call and noted that the increase was mainly due to one-off costs (like restructuring charges). Management said the normalized overheads should be around $30-40m per quarter or $120-$160m per year.
https://app.tikr.com/stock/transcript?cid=25836053&tid=27059648&e=1823722851&ts=2757267&ref=3no6ed
Didn’t management indicate they want to acquire another refinery to scale up? This isnt really what the market wants – we want consistent buybacks.
Yes, they intend to grow the refinery business. Consistent buybacks would be ideal, of course, and the fact that management kind of walked back on share repurchases for 2023 is another part of why the stock is cheap today. Nonetheless, I don’t think it affects the SoTP value unlock thesis.
Activism candidate. They don’t need to buy anything. They need to reveal and unlock the value of what they already have.
Dan Roller/Maran in DK:
https://marancapital.us12.list-manage.com/track/click?u=4522df4fcbfa5be002117f260&id=7211e28f7e&e=e2bab100a3
Delek reported strong Q1’23 earnings this week. The business continues to print strong adjusted EBITDA (up 29% sequentially to $285m in Q1’23) driven primarily by the refining segment benefitted by crack spreads remaining above their historical mid-cycle levels. Operational performance was also boosted by the record-high adjusted EBITDA contribution from DKL.
Meanwhile, management continues to use the generated cash flow for further share buybacks ($40m of stock was repurchased after the quarter end) and debt paydown (DK standalone debt went down from $559m to $213m). DK expects strong operational performance to continue as the total refinery throughput is expected to increase by ~14% as the turnaround of a major refinery has been recently completed. Crack spreads have remained stable at $30/bbl so far, however, future contracts now indicate a drop below the mid-cycle $20/bbl levels by the end of 2023.
Most importantly, management has reiterated its commitment to unlocking the underlying sum-of-the-parts value. While no details or timeline were specified, the CEO noted that the process has been progressing well. It was highlighted that the stake in DKL remains the primary candidate for a potential transaction. See the quotes from the conference call below. However, worth noting that the new Q1 presentation no longer has the SoTP calculations table included.
The market’s reaction to the announcement was rather muted, with the stock up only 7% since the release. DK now trades at $22.23/share whereas its DKL stake alone is worth $22.78/share. The upside to the low end of the management’s SOTP target range stands at 131%.
From the conf. call:
Do you see any holder out there who can help in an activist way and give a gentle push to current management? It looks like the shareholder register is pretty open.
$30+ now, after staying in low $20’s for 5 months. I’m holding thanks to Chris DeMuth and DT.
DK share price has surged almost 30% since mid-July, amid a broader upswing in the refining sector. The sector move has been driven by the significant widening of crack spreads amid strong global demand for refining services as well as due to oil production cuts by Saudi Arabia and Russia (whose oil is easier to transform into diesel). As the upcycle in refining sector continues, DK businesses is firing on all cylinders and is using part of the generated cash for buybacks – $40m of stock was repurchased in Q2 and $25m from July to early August. During Q2’23 conference call in August DK’s management reiterated its commitment to monetize assets and unlock the underlying SOTP value of the company. The whole value unlock process has been dragging on for quite a while already, however, management’s incentives seem to be well aligned and during the call management mentioned a significant bonus compensation it would receive based on the SOTP value realization. At current prices, Delek’s DKL stake covers 73% of the market cap. Upside to the low end of the management’s previous SOTP target range is 50%+.
in case someone missed that: https://seekingalpha.com/filing/7851377?hasComeFromMpArticle=false
What exactly is this? A tender offer?
AFAICT, it is simply a prospectus indicating the potential sale “from time to time, in one or more offerings” by DK of up to 13.5m shares of DKL. It doesn’t specify how they would be sold — either to the public or private bidders.
Sunoco selling ~200 stores for $1B.
https://www.reuters.com/markets/deals/sunoco-sell-204-stores-7-eleven-10-billion-2024-01-11/
Augustusville has published a write-up on DK, dropping the link below. The overall thesis is pretty similar to what is posted here on SSI.
https://augustusville.substack.com/p/portfolio-positions-delek-us-holdings
The key difference is that Augustusville blog is using $300m EBITDA for refining segment after corporate overheads, whereas management’s slide shows $500m. In 9 months of 2023 refining segment generated c. $400m of EBITDA (so $530m annualized) after corp overheads, however, crack spreads were materially above the historical average for the whole year.
Net debt is also zero currently vs $600m in the beginning of the year.
Persuasive idea and one of my biggest positions.
Anyone have comments on earnings today? Every earnings call without monetizing DKL ownership seems like a non-event.
There’s not much to say about the earnings call. The company expects to continue operating at mid-cycle levels going forward and maintaining its approach to capital returns. On a positive note, they made progress on the corporate cost-cutting plan, reducing it by $80m in 2023 with $20m more to go.
But again, as you said, it’s all about the progress with the monetization, whether that’s the DKL stake or the retail business. However, until we see any concrete steps taken, the discount will stay wide. I am inclined to wait a couple more quarters and collect the dividends in the meantime.
If DK participates in this offering….wtf?
https://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20240307:nPn9QGbB1a&default-theme=true#:~:text=indicated%20an%20interest,to%20Delek%20Holdings.
I believe they said that they will not be participating
The press release indicates that DK intends to participate. But that’s on a non-binding basis – does this mean that if the demand for DKL shares in this placement is high enough, then DK will not participate?
“Delek US Holdings, Inc. (“Delek Holdings”), the sponsor of Delek Logistics and owner of its general partner, has indicated an interest in purchasing up to $30,000,000 of the common units offered in the offering at the price offered to the public. Because this indication is not a binding agreement or commitment to purchase, Delek Holdings may elect not to purchase any units in the offering, or the underwriters may elect not to sell any units in the offering to Delek Holdings. In the event that Delek Holdings confirms its interest, Delek Logistics will request that the underwriters consider selling to Delek Holdings such amount of the common units offered in the offering.”
There seems to be mixed information regarding this. I’ll dig into this more.
“None of the common units offered in the offering will be purchased by Delek US Holdings, Inc. (“Delek Holdings”). As a result, Delek Holdings’ ownership of the outstanding Delek Logistics common units will decline from 78.7% prior to the offering to approximately 73.4% after the offering.”
https://finance.yahoo.com/news/delek-logistics-partners-lp-announces-034500621.html
I recently came across a thoughtful comment that questioned whether separating DKL creates value because its assets are an integral part of the refineries, i.e. if DKL gets a higher multiple via financial engineering then the refineries deserve a correspondigly lower valuation. DKL says many of its assets are contracted exclusively to support the 4 refineries. Also, there can be conflicts of interest, e.g. if it would be rational to shut down a refinery due to being subscale then that can harm DKL. Further, the valuation the market assigns to DKL may not be particularly useful for SOTP purposes because of the small free float largely owned by MLP funds that have limited investment options.
Matt. see my comment with the latest thoughts on DK below. I share your concerns. The upside from deconsolidation in this case would come purely from higher multiples, at which the market is expected to value the two entities vs where it values the combined company. Agree, that this is only financial engineering and no real value is created. But exactly the same applies to spin-offs, carve-outs and etc and some of those result in higher valuations for the separated entities.
The market currently attaches minimal (or even negative value) to DK’s refining assets. If DKL gets deconsolidated, that will not be the case any more. When it comes to DKL’s valuation, I think it is rather fairly valued by the market based on earnings. Plenty of MLPs (or even converted MLPs) are dependant on parent for a large part of their business.
DK’s discount to its DKL stake value has recently widened by quite a bit. Based on latest deconsolidated net debt provided by management, DK’s EV now stands $1.11bn, compared to its DKL stake value of $1.4bn + refinery business. That’s a 21% discount to DKL’s stake value alone, fully ignoring any value of the refinery assets. However, this discount is not something new and it is likely to persist will full deconsolidation of DK / DKL happens.
Given several recent developments, a quick update is due.
In early August, DK and DKL announced a series of transactions and asset reorganizations:
– DK sold it’s retail business to FMX for $385m;
– DK sold W2W (premier pipeline backed by investment grade counterparties) to DKL in exchange for $86.6m in cash, forgiveness of $60m payables to DKL and 2.3m DKL common units;
– DK reached a property settlement, which resulted in significant reduction of environmental liabilities;
– DK and DKL renegotiated their inter-company relationship terms in favor of DK. Terms have been extended for 7 more years. As a result, DK transferred 2.5m DKL units to DKL for retirement;
– DKL acquired H20 Midstream $230m;
– DKL also reached a final investment decision for a new gas processing plant, expected to be operational by H1 2025.
Essentially, DK has been streamlined into a pure-play refinery, with almost hit to EBITDA (the loss of retail and W2W assets will be offset by updated DKL contract terms). Meanwhile, DKL scored some new midstream assets, which should add around $55-$85m in EBITDA.
On the Q2 call, management repeatedly emphasized their commitment to deconsolidating DK and DKL and said that these recent moves set both companies up for the next step.
Then just two days ago, DK announced a $400m buyback authorization, bringing the total available for repurchases to $562m – 43% of its current market cap. Buybacks were pretty slow lately, with only around $20m/quarter of share repurchases in 2023 and none in Q1’24. But then in Q2, the pace was picked up once again, with $40m worth of stock acquired in the open market. I guess this new authorization signals that DK plans to be more aggressive moving forward. Aside from that, a new presentation has also been released with a new “Executing DK Objective” slide, which mentions a “Clear path to complete deconsolidation.” (but not the first time similar messages are communicated in presentations, so not clear how serious management is this time around).
Despite these “seemingly” positive developments, the stock is down 15% since August and had no positive reaction to the buyback authorization update. Why is the market not excited? There are a few key reasons:
– The retail asset sale fell short of expectations. As highlighted in the pitch above, management had previously pegged the segment’s value between $441m and $559m, but it was sold for $385m. This was partially due to declining earnings (EBITDA dropped to $44m TTM from the previously used $49m) and underwhelming multiple – 8.6x TTM EBITDA, versus previously guided 9-11x.
– Management’s credibility is barely holding up. After 1.5 years of working on the strategic review to deconsolidate DKL, there’s been little to show for it. Shareholder communication has been weak – full of vague promises with no real explanation for the delays. On the latest call, management dodged direct questions, but at one point said that deconsolidation is more of a “midterm” goal: “This transaction moves us closer along our path to midterm deconsolidation.” So the catalyst could still be years away.
– Finding a buyer for DKL is likely tough, given how intertwined DK and DKL are. DK is DKL’s general partner and generated 55% of DKL’s revenue in 2023. However, it’s not clear to me why DK can’t just convert DKL into a C-corp and spin-out the stake to shareholders. Instead, they are doing the reverse and are dropping assets into DKL (an MLP!), which doesn’t look great optically.
– DK is essentially left with 4 lower-quality, high-capex refineries, making the market less than thrilled about the prospects on deconsolidated remainco.
– DK is cheap, but not as mind-blowingly cheap as it could appear on a quick glance or what the bulls are suggesting. Management’s deconsolidated net debt conveniently leaves out a lot of liabilities/debt that have to be factored in. These include environmental liablities ($32.8m), asset retirement liabilities (c. $15.8m), operating leases (c. $134m) and most importantly – obligation under inventory intermediation agreement with Citi ($472m). Adding these back, DK’s EV (excluding DKL’s stake) jumps from a negative $300m to +$327m. This is still very cheap at mid-cycle earnings ($500m EBITDA, $200m-$250m capex). However, the industry is currently in a downturn, with crack spreads significantly below mid-cycle levels ($12/bbl vs. $20/bbl), and futures suggest this weaker dynamic could persist for a few more years. Refinery segment’s H1’24 EBITDA was at $244.8m, while refinery capex was $138m and overheads (total) stood at $215m.
Overall, my feelings re DK special sit are pretty mixed. I still like the setup, but the waiting game, with no real tangible progress on the DKL’s deconsolidation front has become frustrating. Management just keeps on making promises and mentioned that more details on the deconsolidation are coming in a few months. It’s hard to see the stock moving meaningfully unless we get a clear path towards a strong catalyst (i.e. deconsolidation of DKL).
DKL trades around 8.2x its forward EBITDA (I have taken the forward EBITDA figure from TIKR, not sure how reliable this is), including $70m incremental earnings from the recent transactions. That also includes the new gas processing plant, so it will still take a bit of time for this incremental earnings power to show up in full given that the plant will come online only in H1’24 (although management said it is expected to ramp up quickly after that). Peer ET trades at 8x forward EBITDA, while EPD and MLPX trade at 9.5x. (figures again from TIKR) Over the last 12 months, two other midstream MLP peers NS and MMP (very large) were acquired at 9.5x and 12x EBITDA multiples respectively. So any potential additional upside from DKL’s fundamentals/re-rating (post deconsolidation and/or C-corp conversion) is minimal and the whole event driven angle for DK relies pretty much just on the deconsolidation.
Interesting comments on VIC: https://valueinvestorsclub.com/idea/DELEK_US_HOLDINGS_INC/0925670703#messages
Are there comments later than March 11?
If not, DT’s most recent comment supersedes all.
In the Q3 earnings call, DK’s management reiterated their commitment to the deconsolidation of Delek Logistics Partners (DKL) as part of their “Sum of the Parts” strategy. Management highlighted that recent midstream transactions, especially in the Permian Basin, have demonstrated attractive valuations, underscoring the potential value of its assets. The company is actively exploring various options for the deconsolidation process, with all possibilities under consideration to maximize stakeholder value.
So pretty much same old story, with no additional specifics or timeline provided.
What do you think are the challenges/hurdles they are facing? Or maybe it’s just about their willingness.
As far as I know, management hasn’t specified what they plan to do—whether it’s a sale, spin-off, or another method. DKL derives just over half of its revenue from DK, which might make finding a buyer more difficult.
So it’s more a willingness thing, because nothing can stop them from distributing the DKL shares to DK shareholders and yet management has chosen not to do it.
Delek reported weak Q3 results, with operational performance impacted by the ongoing downturn in the refining industry. Benchmark crack spreads dropped 49% YoY. Refining margins are currently $5–$6 per barrel, way below mid-cycle levels of $15-$20 per barrel. Management expressed optimism for improvement, given some industry capacity expected to shut down soon and refined product inventories currently at low levels. The company has also provided a new mid-cycle valuation slide, estimating DK’s standalone (ex-DKL) mid-cycle EBITDA at $445m. In contrast, refining segment’s EBITDA (before overheads) in the latest Q3 was $10m. At mid-cycle earnings, management estimates DK’s standalone valuation at $29.8-$36.7/share. In the meantime, DK now trades at $18/share, way below its DKL stake value of $21.50/share, with no value attributed to the refining business.
On the conference call, management reaffirmed its commitment to deconsolide DKL, stating “We are actively pursuing that as a key component of our Sum of the Parts efforts”. However, considering the lack of tangible progress in recent years (even though the exact same promise was made), it remains uncertain if this will translate into any actionable steps.
As per my comment on Sep 5, I still like this setup, but the stock probably will only re-rate if management stops talking about SOTP undervaluation and finally starts acting on it (e.g. by deconsolidating DKL). When and if this will happen remains unclear.
Do you have an updated valuation for DK given all the new transactions and current spread?
See slide 8 in the presentation: https://www.bamsec.com/filing/169442624000152/3?cik=1694426
DKL completed the acquisition of Gravity Water Midstream for $285m. The deal was done at an attractive multiple (<5.5x EBITDA) and was touted as synergistic. The more important aspect is that pro-forma DKL “will be approaching greater than 70% of its EBITDA coming from third-party sources”. Higher independence of DKL is positive for the deconsolidation thesis and SOTP value unlock for DK.
DK now trades at $20/share compared to $24.3/share value of its DKL stake. On top of that, management values DK’s standalone operations at $29.8-$36.7/share (most probably overly optimistic), based on mid-cycle earnings. Sum-of-the-parts discount here remains very wide, but that is unlikely to change until management shows a clear path towards the deconsolidation of DKL. There was a bit of insider buying late last year.
DK reported another weak quarter (Q4 2024):
– adj. EBITDA at -$23m, down from $61m in Q4 2023
– The refining segment continues to struggle, with Q4 refining EBITDA at -$70m, compared to -$4m in Q4 2023. The decline was driven by weaker crack spreads and turnaround activities at the Krotz Springs refinery. Benchmark crack spreads were down 13% YoY. Management’s mid-cycle refining EBITDA target of $445m (ex-DKL) looks distant. FY24 refining EBITDA was -$158m.
– On the positive side, DKL posted adj. EBITDA of $107m, up 8% QoQ. Management highlighted that ~70% of DKL’s cash flows will now come from third-party sources, but deconsolidation progress remains slow.
– DK reduceed its stake in DKL from 78.7% to 63.6%.
– DKL announced a $150m buyback authorization through 2026, offering DK a tax-efficient way to further lower its stake. However, management provided no clear timeline or roadmap for full deconsolidation.
How is DK planning to use the proceeds from reducing stake in DKL?
Maybe I’ve missed it, but I don’t think management has communicated this.
If anyone has been following DK it has had quite the ride. I was in and out, in last fall at $20, sad in Liberation April dip to below $12, so when it came back to $21 I got out happy, and naturally DK went up to $26. A good friend in the energy business who trades ethanol corn oil and soybean futures, very knowleddgaeble, said it was due to Rins Policies. “Reneweable identification numbers”. Small refineries can pursue exemptions from biofuel requirements. long story, but these waivers can have huge impacts on profits. It is money from heaven when waivers are granted. Delek has small refineries”. Today DK was down over 8% on heavy volume, “Rumors that small refiners will not get renewable exepmtions. Still up a lot from April, but refinery cracks getting hit hard today also.” When crack spreads get hit, DK price always falls.
From the recent earnings call, the CEO was asked about his confidence in the pending SRE exemptions. “Now I would like to make a comment about small refinery exemptions. As you know, SRE petitions are an important focus area for Delek as our pending petitions are worth more than our current market cap.”
Delek’s filing: https://ethanolproducer.com/articles/epa-4-new-sre-petitions-filed-156-sre-petitions-currently-pending
More about the SRE’s here: https://www.epa.gov/renewable-fuel-standard/renewable-fuel-standard-exemptions-small-refineries
The approval or rejection would make the stock move more than a little either way. Brief research shows that most petitions were denied in 2022 & 2023, However in February the EPA announced it would review some of those. Maybe with a more energy friendly administration there could be more approvals.
The EPA announced decisions today on many waivers for many producers/refiners. The list is at the bottom of the story, but Delek and Calumet (both up around 8% today) had many waivers approved, some full some partial, and a couple of denials. others are still pending
https://ethanolproducer.com/articles/epa-issues-decisions-on-175-sre-petitions
Delek had a nice run off the EPA decision and crack spreaads that are just ripping (russian refineries getting hit plus fall refinery maintenence.) up almost 30% in the 2.5 weeks after the EPA ruling. Now there are whispers that Trump will make large refiners cover half of the small refinery exemptions, which is percieved as a negative for Delek, fairly or not. So probably a bit of profit taking here. It probably won’t test $30 again short term, imo unless of course Trump reverses course.
Delek soaring againcrack spreads up yesterday on reports a Saudi refinery got hit by a drone ( false, it was falling debris) but it did shut down, and a lot of oil for diesel comes from the Persian gulf. I think short term Delek definitely benefits and we can see $45 at some point soon with limited downside as long as this drags on.
DK has had a strong run over the last year and now trades roughly 100% above write-up levels. The discount to its DKL stake has turned into a premium, with DK at $46/share versus $31/share for its DKL stake.
Management values the operating business at $36/share, based on 4.5x normalized $200m EBITDA. Potential SREs could also carry some value, so the overall SOTP discount remains wide.
That said, with the stock at 8-year highs, no clean way to hedge the DKL exposure, and no clear near-term catalysts to close the SOTP discount, I’m removing the idea from active cases.
All valid reasons to close the idea. For now I’m staying long, I think we test $50 although it’s a very fragile high. Right now 3-2-1 crack spreads are way up and as long as there are Straight of Hormuz problems DK will stay elevated, but we’ve certainly seen how fast oil can drop if there are resolutions there. This week DK also got a bump from an explosion at a Valero refinery which forced it to close for a few days. Summer driving season coming as well, so I feel comfortable holding for at least 2-3 months of upside, with a finger on the sell button.