Delek US Holdings, Inc.

Good morning and welcome to the DELEC U.S. Holdings fourth quarter 2021 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 question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Blake Fernandez, Senior Vice President, Investor Relations. Please go ahead.

Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss DELIC-US Fourth Quarter 21 financial results. Joining me on today's call is Uzi Amin, our Chairman, President, and CEO of Reuben Spiegel, EVP and CFO, and Todd O'Malley, EVP and Chief Commercial Officer, 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 DELIC-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 the Safe Harbor Statement. In addition to reporting financial results in accordance with generally accepted accounting principles or GAP, 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 will 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 and we are covering less segment and market information than is incorporated into the press release. On today's call, Reuven will review financial performance. I will cover capitalization and guidance. Todd will cover operations and CapEx, and then Uzi will offer a few closing strategic remarks. With that, I'll turn the call over to Ruben.

Thank you, Blake. On an adjusted basis for the fourth quarter, Delic US reported a net loss of $44.9 million, or a loss of $0.61 per share, compared to a net loss of $204 million, or a loss of $2.77 per share in the prior year period. Our adjusted EBITDA was $68.2 million in the fourth quarter, compared to a loss of $137.6 million in the prior year period. The second paragraph of the press release highlights $6 million of after-tax tailwind or $0.07 per share of items included in the adjusted results. Page 14 of the release provides a breakdown of inventory hedging and other inventory impacts in the quarter. On slide four, we provide a cash flow waterfall. In the fourth quarter of 2021, We had a positive cash flow of approximately $161 million from continuing operation, which includes a working capital benefit of $110 million. With that, I will turn the call over to Blake.

Thanks, Ruben. Slide five highlights our capitalization. We ended the fourth quarter with $857 million of cash on a consolidated basis and $1.36 billion of net debt. Excluding net debt, a delict logistics of $894.7 million, We had net debt of approximately $467 million at December 31, 2021. Moving to slide six, we provide first quarter guidance for modeling. Operating costs are forecasted to be in the range of $160 to $170 million. This reflects the impact of elevated natural gas prices and assumes no impact from ongoing insurance proceeds. With that, I'll turn the call over to Todd to discuss operations and capacity.

Thanks, Blake. During the fourth quarter, our total refining system crude oil throughput was approximately 279,000 barrels per day, reflecting some turnaround activity that was pulled forward at the Tyler refinery. In the first quarter of 2022, we expect crude oil throughput to average between 275,000 and 285,000 barrels per day, or approximately 93% utilization at the midpoint. The remaining turnaround work at Tyler was pushed to 2023, resulting in no major plan turnarounds for the DELIC system in 2022. On slide seven, capital expenditures during the fourth quarter were $66 million. This reflects maintenance at Tyler and initial growth spending on the Permian Gathering business. The full year 2022 capital program is expected to be in the range of $250 million to $260 million on a gross basis. This includes $112 million of spending on discretionary and business development projects of which approximately $59 million resides in the logistics segment, largely associated with gathering in the Permian. Growth capital in the retail segment will be dedicated to a build-out of four new-to-industry locations and the ongoing rebranding of 7-Eleven stations. I'll now turn the call over to Uzi for his closing comments.

Thank you, Todd, and good morning, everybody. The macro-back to up continues to improve, and the lack of major turnaround activity on our assets in 2022 positions us well to capture the margin environment. We're optimistic on increasing activity levels in the Permian Basin, and we see opportunities to grow our existing assets organically. The Partial Diversified Cell Program of DKL units announced in December has been successful to date. This creates optionality to implement additional cell programs into the future. Over time, we believe these cells will underscore the underlying value of DKL units as within As we move into 2022, Wind to Webster should provide a positive contribution throughout the year. Finally, we continue to make progress on our ESG efforts with a 34% reduction target in our Scope 1 and 2 carbon emissions by 2030. We encourage investors to review our sustainability report for more details. With that, operator, will you please open the call for questions?

We will now begin the question and answer session. To ask a question, you may press star then 1 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Manav Gupta with Credit Suisse. Please go ahead.

Hey, Uzi and team. I think what I wanted to focus on is what is sometimes underappreciated is DELEX leverage to positive crude prices. You're probably the highest crude beta in the group. Higher crude prices bring inland rigs. That helps your differentials. They also increase the volumes on your midstream infrastructure that you have built. And in fact, even your retail business tends to benefit when the activity is higher in the Permian Basin. given the location of the stores. Looking at what we are seeing today morning, the way crude is acting, can you help us better understand how this higher crude oil macro would overall play in your hands as we go ahead?

Good morning, Manav. I think you actually said it right. All I need to say is yes, but let me make it a little broader. If we see what happened in 2015, 2016, we go by history. We all remember that Thanksgiving day when the Saudis decided to flood the market. And that was the day that we started to see crude coming down or prices coming down. Then when they changed their strategy, producers started to bring rigs back and production went up. And that led to our best years so far, 2017, 18, and 19, of course, because differentials were very strong, $10, $12, $14. We are in an overbuilt situation of, call it, 2 million barrels right now. The producers are saying that they're going to be disciplined. I honestly think that they will be a little more disciplined than in the past, but let me give you a point of reference here as we know from our own producers. We finished the year with gathering 83,000 bears. to our gathering system or the DPG system. We're finishing first quarter, exiting first quarter with an increase of 50% over 125,000 barrels. Actually, we're gathering more than that as we speak. We expect to be 150 by the end of the second quarter and continue to grow toward 160 from existing producers with existing dedicated acreage toward the 160 number. So all these doubling the production in our system from existing producers, and let me be clear, we are talking to others that are not in our portfolio as we speak because everybody sees it used to be $80. We start to talk to them when it was $80. let alone when it's $100, it's going to be a completely different game. So the DPG thing is the first thing to enjoy it. You will see it immediately in the first quarter. Then as production will continue to go up, we expect differentials to start opening up. It won't happen in 2022, we don't believe. But toward 2023 or the end of 2023, we actually think that $80, $90 is very, very good for Dellex. $100 is overheated, probably will come down after some of the events will come down, but you're absolutely correct. It's going to impact the volume at DPG. It's going to impact the volume at W2W. It's going to impact the differentials, which we can switch back from WTI to Midland. Very positive times for DELIC.

Uzi, a very quick follow-up here. We know in the past you have been given SREs for crops. Now, initially the position of EPA seemed they might not issue SREs, but look, the world has changed. Gasoline price is high. So there is a possibility they might actually give you the SRE to bring the rent price down. But just in the case they don't, would you actually be open to taking a legal recourse for what you believe is rightfully yours? And I'll leave it there.

First, it's up to the government. And I can't explain to myself if the federal government wants to give away the federal tax of $0.18. I don't understand how the other hand is taking $0.12. We think that in the past we got them every year. We think we deserve them across in El Dorado for sure. And probably look at it very carefully in Tyler. We're waiting for their decisions, we're talking to them, or I would say we're responding to their questions when they come. I think politically I don't really understand how the market is willing to accept this crazy idea. But it is what it is. Now, specifically for DELEC, I don't know what they'll do. I know that we feel strongly that we deserve them, and we are willing to take any action that is needed in order to get them.

Thank you so much, Uzi, for your time.

The next question is from Carly Davenport with Goldman Sachs. Please go ahead.

Hey, good morning, team. Thanks for taking the questions. I wanted to just start on capital allocation. As we think about where refining margins have been trending, can you talk about your capital allocation priorities for the first half of the year here? And then I guess what are you looking for or maybe what are the key gating factors in order to consider perhaps a reinstatement of some sort of capital returns program, whether that's via dividend or buyback?

Okay, so Colleen, good morning. First, thanks for taking the time and thanks for the support. I'll take it one by one, if you will. The first one is capital allocation within the system. We do not have any major turnarounds coming our way during 2022. We actually took both, I think, 12 or 14 days that Tyler downed for the strike we were very happy that we did that at the time it did cost us uh lpo lost profit of around 14 15 million dollars uh then we did the same thing at cross just to make sure that we're running through 2022. uh that that's one of the reasons why the core was a little uh weaker uh we probably left on the table 20 million dollars but we saved a major turnaround in tyler So if the coin environment continues, which let me be clear, we don't want to be overly optimistic yet, because the pressure didn't change yet, and we're still in a backwardation situation, and the wins are still very high, but we see a change in the market, we see the demand coming back, and we see our earnings picking up. So if this continues to be the case, then I don't see any reason why we won't look at it very carefully, especially in light of the fact that we're back to spending money on growth, especially at the DPG side and also other areas. So free cash flow, obviously you see the cash on the balance sheet. Higher prices are good for our balance sheet, like any other refiner. We will look at it very carefully during the year.

Great. Thanks for that. And then the follow-up was just on the midstream side and appreciate all the color you gave on the gathering business there. Can you talk a little bit about Wink to Webster, how that's progressing through the ramp-up process and kind of how we should be thinking about the contribution to earnings throughout the year?

Well, similar to what our peers are saying, we're in a ramp-up position. or ramp up phase, I'm sorry, not position, ramp up phase, it's going up or we start to, we are starting, let me be clear, we're starting to see the oil moving and we will ramp it up. I don't see material impact on us this year just because of where the financials are and where we collect the fees because it's still a startup mode. I do want to say that next year and the following years, or by the end of next year, by the end of 2023, we'll be starting to get close to full utilization. And as we said, we are in our mind well above the threshold of 15% in that project. I don't think that in the current environment the – the furniture will stay as compressed because we do believe that producers will start drilling more than what they said so far.

Thank you. The next question is from Roger Reed with Wells Fargo. Please go ahead.

Hey, good morning. Uzi, I think the big question I'd like to hit you on, I mean, Granted, Midland versus Cushing tends to have more of an impact on you. But if we look, obviously, at the last couple of days, we've had a pretty big separation between Cushing and Brent. So, you know, Midland obviously discounted versus Brent more significantly. What does that mean in terms of how we should think about margin potential for you, and what are your thoughts? I know you mentioned earlier, right, capacity issues in the Permian, so we're not gonna have any blowout differentials there, but I'm just wondering if you look across the U.S., some of the issues with moving crude around, as well as the export market, how you think about the differentials going forward.

Okay, so let's go one by one here. The rule of thumb, and we always say, is that we think that under the scenario of $15 crore export without and rains neutral and also no backwardation and no midland, 0-0, we're around between $800,000 and $900,000 million. So that's what we call mid-cycle. That's how we look at it. We look at it on a regular basis and we think we are pretty much there. So if you start applying the different components to that, then you see that the crack is much higher. Obviously, we still have RINs that is headwind for everybody, and also backwardation and the midland is still a premium. I think it's moving around. So cracks will continue to open up in our mind, until something will happen either to the rains or to backwardation in Midland. We always look at it, as you know, Roger, we spoke about that several times, on Midland Brent and not Midland TI. And I think it's opening up. It opened up nicely, probably $1.50 over the last week. So that's obviously positive. we said it all along that we feel that we hit the bomb as a company a couple of months ago, or three months ago, and we're on the upswing. I don't know, Todd, if you want to say anything.

Yeah, I mean, Roger, if you look at the Brent CI, obviously the phenomenon in the front of the market, dead prompt, is being driven by what's happening over in the Ukraine right now. But that has had the effect of pulling the back of the curve wider as well. So if you look at full year, you're kind of in that 380 range. So we think that's very constructive for us. The differentials have continued to be favorable on a relative basis. We think that's going to lead to even more incremental production on the DPG system, ultimately benefiting the refineries, benefiting DKL, and kind of working into the export market to the extent that there's excess. Okay.

And, Roger, it's Blake. Let me just add one thing. I'm sure you know this, but from a sensitivity standpoint, if you assume 95 percent utilization of the system, that's roughly 100 million barrels a year. So, if you just figure every dollar per barrel expansion in the spread that drops right to the bottom line, it's about $100 million. So, I know you probably have that modeling, but just a reminder to you.

That's helpful. Thanks. Follow-up question. I know crude is kind of spiking around here and everything, but just curious what you're seeing in the way of the demand trends across your system as we think about gasoline, distillate, and even jet fuel.

I think demand is picking up everywhere. Even jet, as the pandemic dies, not only in the United States, but around the world. I think we said it a few months ago. that we expect that 2022 to be a very strong year, probably a record year, of course, in terms of several projects. I think that things are coming back. I don't know what the impact of this war will be on Europe and us, but so far demand looks extremely strong. All right. Thank you. Thank you, Roger.

The next question is from Phil Gresh with JP Morgan. Please go ahead.

Hey, good morning, Uzi. Just one follow-up on the capital allocation front. I feel like in the past you've talked about your preferences of dividend versus buyback, and obviously it probably depends on your own share price, but to the extent you would consider something at some point a strong environment, do you have a lean one way or the other there?

Yeah, at this point, we prefer to do the dividend, unless there is an opportunity of something that is really not this location in the marketplace, we prefer dividend.

Got it. Okay. And then just one cash flow question with the working capital tailwind in the fourth quarter. Was there anything unique about that that would reverse in 22, or is this kind of the right steady state to be thinking about for next year?

Hi, it's Ruben. Thank you for the question. Well, the impact was $110 million mostly because of decreasing account receivable. There is a timing issue between quarters, so some of that will have an impact on the first quarter, but we still... expect working capital to be positive in the first quarter. And with the events that are happening in the last 24 hours, if the pricing that we see are sustainable, then that will have an uptick on working capital as well.

Okay, got it. Thank you. Thanks, Phil.

The next question is from Paul Cheng with Scotiabank. Please go ahead.

Hey, guys.

Good morning. Mr. Cheng, morning. Good to hear your voice. Thank you. Historically, in the DKL, you guys focus more on the oil, and I think that's a drive-in term of reducing the sharing, and so correspondingly, probably continue to have a big need on the gas take-away. Is that a business that you guys want to get in or would be interested in, or that you want to stick to your core? You know the oil, and that would linked to your integrated with your refining. So that's where the focus.

Well, that's an interesting question, Paul. Our focus is mainly oil. But if it comes as an ancillary product to oil, like producers that we want us to help them with their gas, we may look at it. Historically, we haven't done it. I think we probably want to think on DKL as a standalone company long term. That's the reason we're selling down to the ATM program some units of DKL. But as DKL will be a standalone company, that may be an opportunity for DKL to look at.

Since you are selling down by about 1% per quarter, Is that a minimum ownership that DK wants to hold or that not really because you control the GP so you don't really need to have any minority, any LP ownership?

Paul, I think the program was designed to initially test the waters and protect our investment in DKL. We've said publicly 80% is definitely too high. We have not defined a specific target. But I think the messaging we're trying to deliver this morning is that we have appetite to do this program on an ongoing basis through the ATM. We're basically able to do about 1% per quarter. And I think the intention, of course, pricing dependent, but the intention would be to continue to implement this each quarter, so call it 4% a year. So I think that answers your question.

Okay. And usually on the Wynn and Webster, I was a little bit surprised you say this year and maybe even next year don't have much impact. I thought the project was backed up by a take-or-pay contract fully on the volume. So should you still receive the revenue or be able to book the cash, receive the cash?

I want to be clear, the project is fully booked, as you just said. It's fully subscribed, but there's a ramp-up period. And in the ramp-up period, we want to be conservative because we have some shippers already signed up for that, which are part of our business already. So during the ramp-up period, which is the initial year, we don't see, we will probably see a few millions but we won't see the full magnitude of the 15% to 17% minimum that we set to ourselves. It will be a threshold of 15%.

Let's assume that by the end of next year that you will be in full put or full runway. What would be the contribution to you at that time?

We said that we are well above our 15% threshold, and the investment is around $350 million. Okay.

And that final question, maybe this is for Ruben. If we look at year end 2021, your current liabilities have jumped by about 1.2 billion versus 2020. Is that increase related to the sharply higher crude oil prices or is it the way that how you manage your working capital? and that to allow you that to be more efficient and be able to fund the operation better. So what causing that big jump or that sharply, the working capital basically exclude cash right now is about a negative billion dollar versus that by the end of 2020 is about say three, four hundred million only.

Paul, this is where I'm getting a little technical, so we'll follow up with you. I'm just going to tell you that as you know, because you took us through this journey within DELEC and also most refiners, when prices go up, we are net positive working capital. You know it and I know it. So in order to tell you where the cash is by the end of the year, we need to put The mall together with what we assume price of crude is, regardless of profitability. Profitability is a side of that. And a day like today will jump our cash by dozens of millions of dollars if it stays like that. So it's very difficult to predict that without saying what is the price of crude.

I'm actually not asking for forecasts. I'm just saying looking at the end of this last year 2021 versus end of 2020, that's a big change. I just want to see whether that's solely driven by the change in the commodity prices or that there's also a change in the way how you guys manage the working capital.

It's mostly the commodity price, but if you need more color on that, we'll get back to you.

Okay. Thank you.

The next question is from Doug Legate with Bank of America. Please go ahead.

Hey, good morning, guys. This is Kaleon for Doug. So thanks for taking the question. My first question is I want to follow up on the dividend, and this is twofold. So the question is, would you consider reinstating at the same quarterly level prior to the cut? And if not, can you talk to us about how you think about right-sizing that dividend, perhaps in relation to DKL? And I'll give you an example. So MPC, MPC's dividend is basically covered by the distributions from MPLX. So wondering if you would use your MLP in a strategically similar way.

Good morning. Thanks for taking the time. I want to be clear. We said it all along. We're not paying dividend out of boring. And at the same time, we feel that shareholders deserve it as soon as we come back from the pandemic. We're inching toward that path. uh period of time we we really don't want to uh go back and change uh our policy uh if the market changes so we were going to take a prudent um uh pace if you will toward that dividend uh we we feel that the cash flow is very uh is very strong and uh especially coming out of the pandemic and we want to be careful not to hurt that. So MPLC moved to profitability, oh, I'm sorry, MPC moved to profitability two, three quarters ago, and they did an awesome job giving money back to shareholders, and we want to watch it and probably try to do the same thing.

Got it. So it sounds like it's still under a lot of consideration. My second question is on maintenance capital. Obviously, industry has focused on preserving cash during the pandemic, which is completely understandable. And you guys have pushed off a major turnaround in Tyler from 22 to 23. So I'm wondering whether 23 will be a year where you return to normal maintenance capital levels. And if you could remind us what that number is, that would be appreciated. Thanks.

Yeah, Kalei, so going into 23, obviously what we've done is push out the Tyler turnaround from 22 to 23. So we will presumably have that turnaround activity there. And to give you the context, historically, we've talked about maintenance capital plus turnarounds being somewhere in the $150 to $200 million range. So obviously we'll try and finesse that, and we're not at a position to start getting into the fine-tooth combing of that yet. But that's historically what we've said. And again, no turnaround activity this year. opens up the opportunity for some growth. And then as we head into 23, we probably will have that turnaround at Tyler.

Great. I appreciate it.

The next question is from Dan Coats with Morgan Stanley. Please go ahead. Hey.

Hey, thanks. Good morning. Just wanted to follow up on the DKI unit sale program. So appreciate the color on the 1% per quarter at the market. Just wanted to ask, is kind of like a larger structured sale on the table or an option that's being considered? Or is the 1% per quarter at the market is kind of the plan as it stands now? Thanks.

Yeah, so look, we're carefully evaluating this over a long period of time. And like I say, the main objective was to protect our investment in DKL. Given the lack of liquidity and float, we felt the best option was to benefit both DKL and the DK shareholders by not taking a big discount was to implement the ATM program. We're selling about 7,000 units a day, and we're already starting to see some improvement in the trading volumes. I think what happens is as that liquidity and float improves, that probably opens up additional opportunities for us to consider block sales, and we are not precluded from doing block sales with the program. So I think the answer is yes, there's probably appetite, but we want to make sure that We're doing that at a time when there's ample liquidity and we're not taking huge discounts for the shareholders at the DK level.

Great. Thanks a lot for that color. And then just kind of switching gears, so I've been hearing about strength in asphalt prices. I wanted to ask, you know, kind of the extent that that would impact profits in your refining business, kind of what trends you're seeing out there and then what your expectations are for that part of your business. Thank you.

Yeah. Excuse me, Dan. This is Todd. We're definitely seeing relatively strong prices. However, keep in mind that this is a seasonal business, right? And right now we're in the winter fill season, building inventories ahead of the paving and roofing seasons as we roll into the spring and warmer weather. When we look at asphalt prices, we do believe they're going to be robust as we go into that kind of end of second quarter, beginning of third quarter period. And we think we're ideally positioned to capture that market on a go-forward basis. Great.

Thanks a lot. I'll turn it back.

Thanks.

The next question is from Jason Gableman with Cowan. Please go ahead.

Good morning. Thanks for taking my questions. Two quick ones. First, on ramping up your gathering volumes in the Permian, can you discuss the types of counterparties that you're speaking to, just in kind of broad strokes, are these the super majors, public EMPs, privates? Where are you seeing that activity ramp really coming from? And then my second one is actually on the bio-diesel plants that you own. I believe you have four of them, if I'm not mistaken. One of your competitors talked about converting their plants into pretreatment unit facilities. I'm wondering if that's something that you've explored and if those economics make sense for you. Thanks.

Yeah, Jason, it's Todd. I'll take the first part of that question, then I'll hand it over to Blake to deal with the bio-diesel piece of it. In terms of the producers that we're speaking to in our footprint, we have a mix of pretty much everybody, to be honest. We are right now, obviously, as you've seen publicized, seeing most exposure from the privates, who are a bit more nimble and maybe don't have the bureaucratic obligations to operate a little slower than the privates have. But we do talk to majors, super majors, and we're also not just discussing business inside of our existing DPG footprint, but we're obviously always on the hunt for opportunities in and around that that could be complementary to the business. So I hope that answers your question. With that, I'll turn it over to Blake on the biodiesel.

Yeah, Jason, good morning. So just to be clear, it's three plants, 40 million gallons of production a year. And, you know, at this point, I think We're not really exploring pretreatment. We are exploring some options on feedstock optionality that we think could improve the economics, but we're not in a position yet to share anything on that front. So I would just say stay tuned, and that's kind of what we're exploring to help the economics of that. And then, of course, I know you know about the renewable diesel option over in Bakersfield, so that's obviously a different angle, but I think that answers your question.

Thanks, yes. It wasn't adding pretreatment to the biodiesel plants. It was converting the biodiesel plants to pretreatment facilities.

Jason, this is Uzi. We're looking always at different feedstocks for these bioplants. And at this point, we're comfortable where we are, especially in light of the fact that we are integrated within our system. And I'm sorry, all these gallons are needed. for the blending that we need to do in our refineries. All right, great. Thanks for the call.

Again, if you have a question, please press star then 1. At this time, there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Uzi Yamin for any closing remarks.

Thank you, Debbie. I'd like to thank my friends and colleagues around the table. I'd like to thank the board of directors. I'd like to thank, of course, your investors and analysts for your confidence in us. This wasn't an easy year, but we have a bright future ahead of us. But mostly I'd like to thank each one of the employees of this great company that makes it what it is. Have a great day. We'll talk to you soon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.