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.
Summary
• 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
