DKL - Delek Logistics Partners LP: Offering A Great Dividend At A Good Price

2023-07-31 14:39:40 ET

Summary

• Delek Logistics Partners LP offers a unique way to benefit from the strong demand for oil in the US, with a dividend yield of over 8%.
• DKL is well-positioned to capture the growth in the US oil industry and has a solid base of revenues from diversified contracts.
• Despite some risks in the oil and gas sector, DKL's strong financial performance and potential for double-digit EPS growth make it an attractive investment opportunity.

Investment Rundown

Delek Logistics Partners LP (DKL) offers a slightly different way to benefit from the still strong demand for oil in the United States. The company operates as a logistics and marketing asset for crude oil and refined products in the US. It was founded back in 2012 and has made strong strides toward ensuring its shareholders get a good return. The dividend yield is over 8% and that makes DKL a fantastic dividend addition in my opinion. The distribution of the dividend doesn't seem to have come at the cost of a deteriorating balance sheet or lack of expansion, quite the opposite.

DKL is positioned very well to capture the growth the US oil industry is set to have . Despite a globally slowing demand for oil as many are still expecting a recession to hit, the need for significant energy outputs isn't as high. If factories and manufacturers aren't at high capacity then energy needs depletes. This isn't enough however to make DKL anything but a buy case now though. The position they hold and the way the market is heading make it a fantastic opportunity to yield solid returns over the next several years, rating it a buy.

A Different Way To Get Oil Exposure

The 5-year stock chart for DKL is very steadily trending upwards, netting investors with a 70% return, or even more if you were buying at the March lows in 2020. DKL was founded back in 2012 and both own and operate logistics and marketing assets for both crude oil and refined products in the North American market.

They have built up the business in 4 different segments, those being Gathering and Processing, Wholesale Marketing and Terminalling, Storage, and Transportation, and lastly Investment In Pipeline Joint Ventures.

DKL has been very efficient in positioning itself favorably for when the next oil hype happens and prices grow exponentially, like in 2022. DKL has 805 miles worth of crude and product transportation pipelines and 600 miles of crude oil gathering systems in AR.

DKL has a decent amount of contracts in shorter timelines, under 1 year makes up 49% of them. But 40% of them are for 5 years or longer. This diversification makes DKL more flexible in making necessary adjustments as they see fit when the market changes. But it also ensures they have a solid base of revenues to lean upon too.

Back in 2022 , the feeling in the oil industry seemed to be that they wanted to benefit as much as possible from the high prices and distribute that to shareholders but were reluctant on starting new exploration projects seeing as the Biden administration was pushing hard for renewables. The fear is that if there continues to be a lack of new projects started then the US will fall behind in terms of production output. It would force the US to rely even more than they currently do on outside sources for oil supplies and bulking up strategic inventories. In March 2023, the Biden administration let the Alaska drilling project pass, however, a massive project labeled "The Willow Project".

Earnings Highlights

Even if many companies in the oil industry saw revenues decline significantly in Q1 2023 as a result of much less favorable oil prices, the opposite happened for DKL which is why it makes it such an interesting investment opportunity. If they are less susceptible to downturns and still benefit heavily from the euphoric parts of the cycle then it looks more intriguing to go with DKL compared to larger oil companies like Chevron Corporation ( CVX ) honestly. With an 8% dividend yield added to the equation, it looks even better.

Net revenues for Q1 2023 reached $243 million, a 17% increase YoY. But DKL also managed to reach a record EBITDA of $93.2 million. This sort of performance I think justifies a higher valuation, which is what DKL has. The p/e is at a FWD multiple of 12, nearly 30% above the sector. But when you have a dividend yield of over 8% and a business model that isn't very susceptible to lower oil prices but grows when they increase I think paying a premium is worth it.

But besides expanding its top and bottom line DKL has made progress on its balance sheet too. The cash position increased on a YoY basis, and total assets grew to $1.69 billion. DKL has needed to take on a significant amount of debt to fuel the expansion of the business, The long-term debt sits at $1.69 billion. But when accounting for the rest of the liabilities the ratio between assets and liabilities becomes unfavorable. With more liabilities than assets, there is a clear imbalance that needs to be fixed and worked on. For coming quarters this will be a key feature for me to watch. I wish for a significant portion of the FCF to be diverted to paying down debt. In 2022 the distributable cash flows reached over $220 million, and I expect it to be similar in 2023. TTM interest expenses were $100 million, so it will take a toll on FCF, but it's not high enough to deleverage DKL and make it out to be a too risky investment right now.

Coming Report

We are not far from the next earnings report from DKL. On August 8 they are scheduled to release the Q2 results. I think it will be incredibly important to see further contracts signed which should bring some comfort and reinsurance to future revenues.

But as oil prices are rebounding I think we are in for a QoQ growth for both the top and bottom line of the company. EPS estimates are at $0.81 for the Q2 quarter, but I am quite confident that we will see a beat here and stronger operational performance will be widely visible. The time to buy seems to be now as many are estimating crude oil to rebound . This will inevitably be visible on the coming reports from DKL and being invested before that I think will help ensure the largest returns. Even if Q2 doesn't produce a substantial beat on top and bottom lines, I think we are to also look at Q3 and Q4 even more, perhaps. Some comments on the dividend and potential buybacks could be because of the share price increasing too. If DKL sees they have the potential to perform some buybacks now when the price is suppressed, I think it will have investors very interested in the business.

Risks

The oil and gas sector faces significant risks, with demand destruction and recession looming as critical concerns. The inherent volatility of oil and gas markets makes them susceptible to fear and speculation, creating an environment of uncertainty. In the face of economic downturns or even apprehensions about future recessions, energy markets can experience a downturn as demand diminishes.

Mitigating these risks requires proactive measures and strategic planning by oil and gas companies. They may need to diversify their revenue streams, explore alternative energy sources, and optimize operational efficiencies to navigate through challenging economic conditions. Additionally, effective risk management and financial planning become paramount to cushion the impact of downturns and ensure long-term sustainability.

Final Words

As I have mentioned before there seem to be some reasons for a higher valuation when looking at DKL, they are less susceptible to volatile commodity prices and don't get the same treatment as other more pure-play companies. The FWD p/e sits at 12, which is a fair bit above the rest of the sector. With a higher multiple, it's not that appropriate to compare it like this to the rest of the sector I think. DKL trades more like a logistics company, rather than a commodity company. However, it might be seen as the fact that the EPS has grown 52% yearly in the last decade making paying a 12x premium still very fair. I find it unlikely that growth will continue, but seeing double-digit EPS growth over the next couple of years seems reasonable.

I am fine paying that premium and with a large dividend yield of over 8% as well, the investment cases grow, and it's not hard to see why DKL shouldn't be a buy right now.

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