Thursday, March 3, 2016

45th AIM Student Equity Update by Patrick Schulz. Delek US Holdings (DK): “A Rebound in Oil Prices Could Spark a Rally”

Delek US Holdings, Inc. (NYSE: DK, $15.82): “Rebounding Oil Prices Could Propel Delek into a Refined Future”
By: Patrick Schulz, AIM student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Delek US Holdings, Inc. (NYSE:DK) functions as an integrated downstream energy company, which operates in petroleum refining, wholesale distribution of refined products, and convenience store retailing businesses.
• Crude refining continues to increase capacity and improve flexibility, even in a struggling commodity price environment.
• Continued focus on their retail front, with expansion in their store operations.
• Growth focus through acquisitions enables Delek to purchase cheap companies that have struggled over the past year with low commodity prices.
• Strong dividend payment (regular $0.15 quarterly, 3.79% yield) coupled with a $125M share repurchase program gives investors increased confidence for a rebound in 2016.
Key points: Delek US Holdings, Inc. remains a strong competitor in the refining industry. Off to a slow start in 2016, Delek looks to rebound on what appears to be a stabilization in commodity prices. Across the board, Delek has controlled costs and improved operations, in an effort to counter-act low commodity prices. Under these new provisions, management has given a bright outlook for 2016 and beyond.
Delek recently reported their Q4 and 2015FY earnings on February 26th, 2016. They posted FY revenue of $1.36B, a decrease of 22.7% year-over-year, which missed consensus estimates by $40M. However, Delek was able to improve their cost structure and efficiency, resulting in Q4 EPS of $0.07, beating estimates by $0.05. In addition, management also stated they ended the year with $302M in cash, with an impressive $674M of net debt.
When looking at their refining segment, management has directed an increased capacity and improved flexibility, thus allowing for future growth. Management also indicated a decline in capital expenditure needs over the next few years, with no scheduled turnarounds until 2019/2020. This segment continues to see success as their Colonial Pipeline space has increased access to other markets, with Delek focusing on improving their niche markets. Typically, a refining segment requires significant capital expenditures in order to establish an effective operation, and Delek has completed their large investment period. From now on, Delek will focus on improving their capacity and flexibility in order to generate excess returns.
In their retail segment, Delek operates in 355 stores across seven states and is currently undertaking a store improvement directive, with 60% of stores being re-imaged or updated. This segment continues to expand organically and management is looking to further increase expansion through more store openings, including large format stores. In addition, nearly 70% of their retail fuel demands are supplied by their refining segment, a compliment to Delek’s business model.

On May 14, 2015, Delek acquired 48% of Alon USA Energy (NYSE:ALJ) in order to establish long-term value creation. This acquisition gives Delek the opportunity to expand their footprint further West, through multiple refining and retail locations. Currently, Delek is under a shareholder agreement, which places a limit of 49.99% of Delek’s ownership of Alon, until May 2016. After this expiration, Delek is able to purchase an unlimited amount of Alon stock.
What has the stock done lately?
Since oil has reached a low point of $26.21 on February 11th, it has rallied nearly 30%. During this same time period, Delek has appreciated nearly 20%. Still, year to date, Delek is down roughly 35%, compared to oil decreasing only 8%. The continued improvement in commodity prices will further strengthen Delek’s stock price, however, this stock will need another strong quarter or two in order to increase investor buying confidence.
Past Year Performance:  Over the past year, Delek has decreased by -56% in value, comparable to the   -50% decrease in oil prices during the same time period. A strong balance sheet and continued share buyback programs will encourage stock appreciation over the short- and long-term; as long as commodity prices do not collapse once again.

Source: FactSet

My Takeaway
Delek has proven they are able to bear one of the worst commodity price collapses by maintaining strong cash levels and relatively low amounts of debt. Their continued advancement across their three segments will allow Delek to maintain cost controls, through improved capacity and efficiency. The continual rebound in commodity prices will further drive Delek forward; bearing any internal financial hardships. Their 52-week range of $12.54-41.15 proves Delek is just beginning to rebound from their bottom, with a lot of room for future growth.

Source: FactSet