Good morning, and welcome to the Delek US third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your questions, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Blake Fernandez. Please go ahead.
Morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings third quarter 2022 financial results. Joining me on today's call is Avigal Soreq, President and CEO, Reuven Spiegel, CFO, Todd O'Malley, EVP and COO, as well as other members of our management team. The presentation materials used during today's call can be found on the investor relations section of the Delek US website. As a reminder, this conference call may contain forward-looking statements as that term is defined under federal securities laws. Please see slide two for our safe harbor statement. 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 release has been reviewed as we are covering less segment and market information than is incorporated into the press release. On today's call, we'll begin with comments from Avigal, then Reuven will review financial performance and capitalization. Todd will cover guidance and CapEx, and then we'll turn it over to Q&A. With that, I'll turn the call over to Avigal.
Thanks, Blake, and good morning. We had another quarter of strong operational performance. Q2 consecutive quarters of record refinery utilization and solid results excluding inventory FIFO movement. Additionally, the outlook for downstream energy industry is positive. I'm proud of the team execution and the focus on safety and reliability. Switching gears to talk about the priorities we laid out last quarter. First, returning cash to shareholders. We expect to repurchase $75 million -$100 million of our outstanding shares during Q4. We increased the regular quarterly dividend to $0.21 per share. In the third quarter, we exceeded our share repurchase guidance with a total of $40 million of buyback. Second, focus on capital allocation. We plan to retire between $100 million -$150 million of debt during Q4. This reduces our debt level and maintain a flexible balance sheet.
Third, we started our initiative to unlock the sum of the parts value of our assets. We hired a head of corporate development and engaged a banker to advise us on strategic options. We will communicate our plan to the market once complete. After one full quarter in my role as a CEO, I continue to be impressed with the depth of our team and the strength of our operation. I'm excited by the many opportunities we have in front of us to deliver additional value to our shareholders and remain focused on execution on our key priorities. I look forward to updating you over the upcoming quarters. With that, I will turn it over to Reuven.
Thank you, Avigal. Net income was $7.4 million or $0.10 per share. On an adjusted basis for the third quarter, Delek US had net income of $1.1 million or $0.02 per share, compared to net income of $3.6 million or $0.05 per share in prior year period. We had adjusted EBITDA of $136 million in the third quarter. This includes $225 million of inventory headwinds associated with FIFO accounting. Beginning in the fourth quarter, we will remove inventory impact from adjusted results. This should help put us on an equal footing with peers from accounting perspective and make our results easier to analyze for comparative purposes. On slide four, we provide a cash flow waterfall. Strong cash flow allows us to increase our buybacks and reduce debt.
As Avigal mentioned, the board approved $0.21 per share regular dividend that will be paid December 2nd to shareholders of record on November 18th. Slide five highlights our capitalizations. We ended the third quarter with $1.15 billion of cash, and on consolidated basis, we had $1.58 billion of net debt. Excluding debt at Delek Logistics of $1.43 billion, we had $146 million of net debt at DK as of September 30th. In October, we had two noteworthy credit transactions. First, DKL extended its credit facility to $1.2 billion, including senior secured revolving commitments of $900 million with a maturity date in October 2027, and a new secured term loan of $300 million with a maturity date in October 2024.
Separately, Delek US expanded the asset-based credit facility to $1.1 billion with a maturity date of October 27. Before handing it to Todd, I would like to mention a key near-term initiative we have launched to evaluate our company's cost structure to ensure we remain competitive with peers. We have engaged advisors and are currently conducting this analysis. We plan to share additional information once we have concluded our work. With that, I will turn the call over to Todd.
Thanks, Reuven. On slide six, we provide fourth quarter guidance for modeling purposes. Operating costs are forecasted to be in the range of $190 million-$200 million. This is a reduction from 3Q levels, which is a result of lower natural gas and electricity prices and slightly lower utilization rates. G&A expenses in the fourth quarter are expected to be in the range of $82 million-$87 million. This is elevated relative to 3Q, as the company typically accrues for bonuses in the second and fourth quarters of each year. Finally, interest expense guidance of $55 million-$60 million for the quarter reflects the consolidated impact of DKL debt. During the third quarter, our total refining system crude oil throughput achieved a new record of approximately 300,000 bbl per day.
In the fourth quarter of 2022, we expect crude oil throughput to average between 280,000 and 290,000 bbl per day, or approximately 94% utilization at the midpoint. On slide seven, capital expenditures during the third quarter were $81 million. The full year 2022 capital program is expected to be approximately $300 million on a consolidated basis. Later this month, we will issue our third annual sustainability report. We are focused on making continuous improvements in our ESG efforts, and we encourage investors to monitor our journey. With that, operator, will you please open the call for questions?
We will now begin the Q&A session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Roger Read with Wells Fargo. Please go ahead.
Yeah, thank you. Good morning.
I guess I'd like to come back to the capital allocation slide number three. I just want to understand partly because the share repurchase guidance for Q4 is well above what I was putting in my model how you're thinking about the share repos. Are we gonna be kinda you know going as we walk along here you know margins stay elevated and so guidance will be more short-term like this? Or are you thinking on a longer-term basis of share repurchase magnitude? You know I'll tie that in I guess to the strategic overview question. Are we essentially waiting for that before you know we get a more long-term guidance I guess?
Hey, Roger. It's Avigal. Good morning. How are you?
Morning.
We said in the previous call that we're gonna put a shareholder-friendly company in the top of our priority, and we are walking the walk, not just talking the talk. If you remember last quarter, we bought back the dividends. We had a special dividends. We increased the total buyback program to $400 million, and we exceed our buyback guideline to $40 million this quarter versus the guidance we gave of 25-35. Obviously, this quarter, we gave the guidance of $75 million-$100 million, and we are planning to do so. And we are also planning to reduce the debt. We obviously had a perception study with the investors, and that's what investors are expecting us to do. Going forward, Roger, we look at very robust market, and we see a very.
The company is performing very well. With that said, going forward, we are looking to continue with the buyback aggressively well into 2023.
Okay. Appreciate that. The other question, just operationally, as you look across your system and you know, you're selling gasoline and diesel, any thoughts, any specific numbers you can share in terms of what the sales look like compared to, say, prior quarter or compared to, you know, pre-COVID period? You know, just how you're comparing on a demand side here.
Yeah. Hey, Roger. It's Todd. Good morning.
I'll use our retail footprint, which I think is clearly pretty representative of what happens inside of our kind of total envelope of refinery operations. We're seeing same store fuel sales kind of 7% up year-on-year. Obviously, we have a certain footprint of retail locations that are distillate heavy. We also have another subset that's gasoline heavy. I think we're, you know, pretty good representation across the Permian Basin. On a year-on-year basis, again, we're up and feeling good that demand is sticky here. Certainly, the lower prices recently have buttressed that view. We feel good about where we are now and what the outlook looks like for 2023 on the demand side of the barrel.
Thank you. Turn it back.
Thank you, Roger.
The next question is from Ryan Todd with Piper Sandler. Please go ahead.
Great. Thanks. Maybe I could follow up. I know it's a hard question to answer, but as we think about the effort. I mean, I know you've engaged bankers, the effort you're making to try to address the sum of the parts discount on the stock. Can you maybe talk at high levels about, you know, if there's a view of what it is that you know, is helping to drive the discount? Is it the consolidated debt of DKL on the balance sheet and the, you know, perception of higher leverage than you really have? Are there fundamental ways in which you think that is, if that's not the, that it's best addressed, in terms of any high-level thoughts?
Maybe timing, you know, as we look forward, is this something that we may hear in the next couple of months, in six months? Any high-level thoughts from that point of view?
Hey, Ryan, it's Blake. I'll take a stab. As you know, there's any number of things that can drive market dislocations, and so it's not always easy to pinpoint specifics. I think you hit on one of them for sure, the perception of over-leverage on a consolidated basis. We have talked quite extensively to investors about the historical gap between the consolidated versus deconsolidated debt, which has trended anywhere from 8%-10%, which is much more substantial now, primarily due to the DKL acquisition of 3Bear . To a generalist portfolio manager who goes and pulls our debt leverages on Bloomberg, we look very over-levered, whereas if you deconsolidate the debt, we are not very levered at all. That's one of the drivers.
I think one of the other issues is the lack of liquidity and float at DKL, and that's something we've been progressively trying to improve. I think we've benefited from being a kind of quote-unquote last man standing in terms of the rest of the MLP group going away, and we've increased our weightings within various, MLP, indexes like the Alerian. That is improving our trading volumes and should be something we can work with going forward as we evaluate some of the parts opportunities. The final thing I would highlight is, you know, during the downturn in COVID, we had to cut our dividend, our refining system had negative EBITDA. I think we're starting to demonstrate now that the refining assets are actually very profitable and delivering.
I think that's just gonna be something over time that investors get more and more comfortable with, that as we can demonstrate we have strong cash flow from these facilities, I think that's gonna help. At least from my perspective, those are three data points that I think are probably contributing to some of the disconnect. As far as timing, we haven't really committed to anything specific. We are trying to demonstrate, we said we hired a corporate banker, Mark Hobbs came on board. We've now formally engaged banks, and we're looking to demonstrate something that's probably over the coming months. I think it's gonna be fair to say we'll have an announcement of a plan. I don't think that necessarily means a plan effectuated.
Obviously, depending on which route we go, that could take some time. We do wanna keep the market abreast of the progress we're making.
Great. Thanks. That's very helpful. Maybe just as we look forward to 2023, you know, you're spending $300 million in CapEx this year in 2022. Are there any, you know, large moving pieces that we should be thinking of in terms of next year's capital budget, you know, ballpark direction one way or the other?
Yeah, Ryan, it's Todd. I think, you know, $300 million this year, obviously, a lot of that was dependent on growth that we've seen in gathering and across the system. Again, we continue to see that as long-term strength, so we would anticipate that continuing through 2023. The one outlier I would say that we didn't have in 2022 was a turnaround at any of our plants. We did some small surgical strikes, but we do have the Tyler turnaround scheduled at some point during the first half, at least initially right now, of 2023. We'll come back and update the market more on that as we get a little bit closer to defining exactly what that timeline is.
I think, you know, marginally higher than that $300 million in 2023 is probably a good target to set for yourself as we go into end of year and next year planning.
Perfect. Thanks, Todd.
The next question is from Carly Davenport with Goldman Sachs. Please go ahead.
Hey, good morning. Thanks for taking the questions today. Can you just talk a little bit about the efforts that you're making around the cost structure? Are there any numbers that you can put around the potential size of a program at this point, or kind of any color you can provide about what kind of key areas you're targeting to drive efficiencies?
Hi, Carly, it's Reuven. Well, we're looking at both, you know, the G&A and the OpEx as part of the zero budget process that we have started. You know, we have some initial thoughts and findings. I think we wanna complete the work, which will be done in the next few weeks, and then we will have a whole structure around it. I don't have, you know, an exact number to give, but we will communicate our goal once we are set on all the many programs that will be under the zero budget.
Got it. Great. Thank you. The follow-up was just kind of around the logistics side. As you've had a couple of quarters here with 3Bear under your belt, kind of any key learnings that you would flag as you integrate those assets into the portfolio or any areas that have potential to surprise to the upside relative to initial expectations?
Carly, thanks again. That's a great question. When we spoke, we obviously discussed how a strategic debt acquisition for us, right, it's opened us not just from a geographic standpoint, but also from a line of product that we believe in. By and large, as I mentioned on the call, we are very pleased from the integration. The numbers coming in line with our expectation, and we are very pleased. Going forward, you know, we have a business to manage, and we have a safe operation always to keep, and we want to get the most out of those assets and the justification we got.
Thank you.
The next question is from John Royall with JP Morgan. Please go ahead.
Hey, guys. Good morning. Thanks for taking my question. Just a follow-up question on capital allocation. Looking at your guidance for both the buyback and the debt pay down in 4Q, I'm assuming unless we have a major improvement in the macro that you're expecting to draw down some cash. And if so, I think you're sitting over billion today in cash. Is there a thought to working that cash balance down over time and maybe doing more on the buyback than you would see from your post-dividend free cash flow? I know you talked about being aggressive on the buyback, so is that a safe assumption that you may continue to draw some cash?
Hi, this is Reuven. Thank you for the question. I think if you look at the buybacks and dividend, these are done on free cash flow we're generating. When it comes to reduction of debt, I think the way to look at it is a combination of the two. Because on one hand, banks are paying for deposits today, but it's around 3.5%. On the other hand, since we have floating rate, we are getting, you know, increased rate on our loans. We will use a combination of free cash flow and some of the cash that we have on the balance sheet to pay down the debt.
Okay, great. That's helpful. Thank you. Just looking for your updated view on Midland differentials. Midland continues to trade above Cushing. What's your view on production growth versus takeaway in the Permian, and the Midland differential going into 2023?
That's a great question. We are looking in the Midland production, and we obviously have—we are very close to the producer we have over there. We have seen the rigs in our area coming up very nicely on the DPG area. Being more specific about differentials, Midland is gonna get full between 12 months-18 months from today, more or less. We are today around 5.7 million bbl a day. We've seen a nice increase of more than 600,000 bbl last year. We are optimistic on that differential going forward, and I think that we'll see more news around that frontline in the next 12 months-18 months.
Thank you.
The next question is from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.
Hey, good morning. Do you have a target for your minimum cash balance? Is it reasonable to think that buybacks would be more than your free cash flow after dividend in 2023?
Matthew, I don't think we wanna give a specific cash target per se. I think we've said historically that you know we need to maintain a probably $500 million-$600 million or so to run the business. Obviously, we're comfortably above that. It is nice to have additional dry powder and potential recession scenarios and/or potential M&A. I think where we're trending right now seems to be pretty comfortable. As Reuven said, we may use a little of the cash to pay down some debt, which probably makes sense given the arbitrage between interest expense and cash benefit. In terms of 2023, I think you were asking, are we gonna basically use cash to do buybacks? I think Avigal is of the opinion that you know we're looking to use free cash flow.
I don't think we wanna pinpoint anything specific. I think the robust buybacks that we're looking at right now are for, you know, before this sum of the parts scenario where we feel like the stock is really discounted. Once we finalize the sum of the parts scenario, we understand what the various entities look like. I think at that point, we're gonna get more specific in terms of a formulaic approach.
Sounds good. Thanks. Is there any update on your RD investment in terms of, you know, when it's expected to start up and when the contribution might flow in through to Delek?
Yeah. Matthew, I think the best thing to do is look at the Global Clean Energy filings. The last I believe we have seen is that they had deferred the start up to March with, I believe, a 90-day option to extend. You know, just to be conservative, maybe you're looking at a mid-year, next year kind of start up, and of course, we have a 90-day option after that. It's probably feeling like a late second half of the year type of scenario should we enter the project.
Got it. Thank you.
The next question is from Doug Legate with Bank of America. Please go ahead.
Hey. Good morning, guys. This is Kalei for Doug. Thanks for taking the question. My first question is a follow-up on the oil basis. WTI Brent has widened here modestly. Just hoping that you can give us an updated view on how you see this trending post the SPR releases and noting that, the compression in U.S. to E.U. gas spreads also helps the economics on [seller crude].
Yeah, Kalei, it's Todd. Thanks for the question. I think, you know, you watch the markets as closely as anybody out there. We've kind of seen the Brent-WTI, in the prompt settle around that $7-ish range, out the curve. We are kind of, you know, mid to high fives to maybe low sixes on any given day. We firmly believe that due to what Avigal was commenting on earlier in terms of the dynamic between growth that we see in the Permian as well as no incremental takeaway capacity being built, that Brent-WTI spread is gonna continue to remain wide and roll up to that kind of $7-ish level on a go-forward basis.
As we truly reach that kind of, like, 80%-85% utilization rate of existing takeaway capacity, that's when we think we'll start to see the Midland diffs do the work and Brent-WTI probably hold in at those wider levels.
I think that's what we're looking at is 10 seconds.
I appreciate that, Todd. My second question is on Waha basis on gas. Prices recently dropped to zero because takeaway there is very tight and it won't get fixed for another several quarters. Wondering if you can talk about how this benefits the OpEx and hydro treating costs at Big Spring.
Yeah. We don't obviously break it down into individual plant level from that perspective. I think what we can say is that we are obviously keenly attuned to what's happening in the Waha area. We think that's gonna continue to your point. Every day, we are working on the commercial side of the ledger to increase our exposure to Waha gas. I think it's safe to say that Big Spring is 100% exposed to that market. We are again actively looking at different projects, some of which have kind of come to fruition through the acquisition of 3Bear and the inclusion now of natural gas in our gathering and processing portfolio, and using that to leverage into potentially capitalizing on accessing Waha for some of the other facilities.
I think there's more to come on that, and we'll continue to update the market as and when necessary.
I appreciate it. Thank you.
Thanks, Kalei.
The next question is from Paul Cheng with Scotiabank. Please go ahead.
Hey, guys. Good morning.
Hey, Paul.
Two questions, please. The first one, want to talk about the hedging. Can you share with us what is the nature of the hedging that now you guys are doing, and what is in the future, are you going to reducing the activity or that you're going to increase or that stay the same? Secondly, on the RD in Bakersfield, what is your current thinking? You're saying that if you do get in, it would be the second half of next year. What is the latest intention, the current look? Also, just curious, you have four biodiesel plants or the blending facility. Are those making money in the third quarter? Thank you.
Hey, Paul, it's Blake. Let me handle the first two and defer to Todd on number three. On the hedging piece, as you know, we don't disclose specifics, but I will say this. I think as we said in the script that we're planning going forward to begin adjusting out the other inventory impacts. With that being said, I think that allows us the opportunity to then minimize the hedging, because historically, those two should be offsetting each other. If we're able to adjust out the inventory, then it really makes sense to reduce our hedging exposure. Our plan going forward is to probably minimize or reduce the amount of hedging that we've done historically. I hope that answers that. That's really all we can say from that level of disclosure.
On GCE, you know, it's $13 million for us to participate in a 30% interest, so I don't wanna over-commit to anything that we're gonna do in the future. I think most would view that as a fairly small amount of capital to participate in renewable diesel, to get our foot in the door and dabble. I think it's likely that we would participate. It tells a nice ESG story. It allows us to kind of understand the market. I think I'll probably just have to leave it there. Then I'll give it to Todd for the biodiesel plants.
Yeah. Thanks, Blake. Paul, just to clarify, we actually have three biodiesel facilities that exist inside of our footprint. Those three facilities are indeed profitable, and are, I will remind you, to a certain extent, exposed on the upside to LCFS, obviously, as well as what the D4 RIN does and a mix of various different feedstocks. Those are profitable, and we continue to believe that they will be profitable on a go-forward basis, but not in a material way that would impact results for the total corporation.
Great. Can I just sneak in a very simple accounting question? Since you are under the FIFO accounting, why is it that we still have the LCM?
Paul, let us come back to you offline on that. I think it's a small amount compared to the LIFO peers, but I think it's a more detailed accounting question and it'd be better just to take offline, if that's all right.
Okay. Will do. Thank you.
The next question is from Dan Kutz with Morgan Stanley. Please go ahead.
Hey, thanks. Good morning, everyone.
Hey, Dan.
I just wanted to ask, I guess, kind of a broad high-level question on in terms of what you guys are seeing from a demand perspective across your system and kind of what your outlook is moving forward, maybe parsing it out by the different product markets. Thanks.
Yeah, sure, Dan. This is Todd. As I mentioned a little bit earlier on the call, we're seeing sequential growth in our retail footprint year-over-year, kind of running, let's call, about 7%. We think that's, you know, pretty representative of what is happening inside the Permian Basin, both on gasoline and diesel demand. We have obviously, in the last quarter, seen pretty robust product markets in New York Harbor area and in the Chicagoland market. New York based on limited imports and some maintenance. Chicago based on the unfortunate incident that occurred at one of the refineries there in Toledo. Obviously, those are shorter term, but by and large, we see demand continuing to be robust in our footprint as well as elsewhere in the United States.
Certainly, lower flat price has continued to help make the consumer resilient. I would say the last kind of shoe to drop that we've seen is on the jet fuel side of things where we are effectively now back to kind of pre-COVID levels, and obviously can take advantage of that inside of our system. I'll leave it there.
Okay. Also just to build on Todd's comments, obviously, the supply side is playing a huge role. I think that's pretty much the first time in the history of refining that we see such a big reduction in production. That also plays. The supply side is as important as the demand side that we see strong. We remain, as we said, very optimistic about the business and about the sector. Thank you.
Great. Thanks a lot. That's really helpful color. Then, I guess I just was hoping that you could refresh my memory or let me know if there's any updates on kind of what your mid-cycle EBITDA outlook is, you know, appreciating that the backdrop kind of supports above mid-cycle earnings for the foreseeable future here. But just wondering with the 3Bear Energy acquisition and, you know, a lot of kind of strategic projects underway, if you could share the latest on your mid-cycle outlook. Thank you.
Yes. Thanks. That's a great question, and Blake can follow up on that later on if you guys want it. We didn't give a specific guidance regarding the mid-cycle. What I can tell you is that when we look today and everyone is basically in a budget season as we speak, we see a more robust market, and we think that the mid-cycle is higher than we thought before. On the top of that, we see a strong demand coming from our customers. Going forward, we are optimistic, very optimistic about what we see from a downstream demand and the supply.
Great. Thank you. I'll turn it back.
The next question is from Jason Gabelman with Cowen. Please go ahead.
Hey. Morning. Thanks for taking my questions.
Morning, Jason.
I wanted to first ask about the debt reductions that you discussed. Historically, I think you've carried both a high cash balance and high debt levels as well, but overall low net debt levels. Can you talk about why now is kind of the right time to reduce that debt and what maybe a gross debt target is for the business excluding the MLP, if you have one? My second question is on the strategic initiatives that you're exploring. Thanks for talking us through some of the considerations on that front. One that you didn't mention was just size of the parent business.
I wonder, as you explore options to enhance value, if you think the DK parent is at the appropriate size or if there's any consideration in growing the business. Thanks.
I would like to answer the two questions. I would like to be as specific as I can . We are doing the debt reduction. Obviously, there is incentive on the market because the dislocation between interest on the borrowing side and the return and what you can get on the deposit side. Our strategy of having meaningful cash on the balance sheet did not change. We still want to maintain a meaningful cash on the balance sheet to allow us one, to be ready for any day if it present itself, and second, to be able to be quick and nimble about opportunities. We are doing some adjustments.
Some of them are, as Reuven alluded, from a free cash flow, and some of them from the cash that we have on our balance sheet. Going to the second question. Obviously, we just finished an acquisition with 3Bear June 1st, so it's just five months now, and we are very pleased about it, and we are digesting that. Our commitment is to do inorganic growth only if it's accretive to shareholders. It's not that we are not gonna do an M&A just for the sake of M&A, and we're not gonna grow just for the sake of growing. We are gonna grow in order to allow the investor to have a good investment in our share and to have accretive investment in Delek.
I hope that gives you some guidance of what we're gonna do or not do.
Great. Thanks.
This concludes our question and answer session. I would like to turn the conference back over to Avigal Soreq for any closing remarks.
I want to thank first and foremost our employees that were able to have a record quarter from a utilization standpoint and operation. Very proud of the team performance. We want to thank you, the investors, for staying with us and believing in Delek. We really appreciate. We want to thank the management team here in the room for running this company and guiding Delek and fulfilling the potential we can. Thank you to everyone, and we'll meet again in the next quarter. Thanks.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.