Investors may not have seen much movement in Delek Logistics’ share price over the past few months, but the company’s consistent distributions are worth noting. Recently, in April 2024, the company increased its quarterly distribution to $1.07, resulting in a dividend yield of approximately 10%.
While the share price may remain flat in the near future, the steady and well-covered distribution makes DKL an attractive investment for income-focused investors.
Partnership Overview
Delek Logistics is a master limited partnership that provides essential services for the oil and gas industry. According to their annual report, the company offers “gathering, pipeline, and other transportation services primarily for crude oil and natural gas customers, as well as storage, wholesale marketing, and terminaling services for intermediate and refined product customers.”
Their core assets include pipelines, storage facilities, and terminals, primarily located in the Southern US, around Texas and neighboring states. These assets support their parent company, Delek US, particularly Delek’s refineries in Tyler, Texas, and El Dorado, Arkansas.
Delek Logistics operates in four segments: gathering and processing, wholesale marketing and terminaling, storage and transportation, and investment in pipeline joint ventures. Despite a slight decrease in revenues from $1.04 billion in 2022 to $1.02 billion in 2023, the business remains stable with resilient cash flows consistently above $200 million annually.
Management has focused on maintaining stable cash flows and increasing distributions, with the current distribution around $4 annualized.
MVC Provisions Are Attractive
Delek Logistics has demonstrated resilience, particularly during the pandemic. Cash flows increased from $193 million in 2020 to $275 million in 2021, a 42% rise. This stability is partly due to the minimum volume commitments (MVC) provisions in their contracts, which ensure a minimum revenue level by requiring customers to transport a set volume through Delek Logistics’ pipelines.
These long-term agreements provide a buffer against market volatility, protecting unitholders from moderate fluctuations in oil prices.
Improving Financials
Delek Logistics’ Q1 2024 earnings report highlighted strong financial performance:
- Net income attributable to all partners: $32.6 million
- Quarterly EBITDA: $101.5 million
- Distributable cash flow: $68.0 million, with a DCF coverage ratio of 1.35x
The company announced its 45th consecutive quarterly distribution increase to $1.07 per unit, demonstrating robust financial growth. Debt levels have also improved, with the debt ratio decreasing to around 4.01x from 4.34x at the end of 2023.
Management has focused on growth efforts, particularly in the gathering and processing segment, with the Midland Gathering system now gathering up to 230,000 barrels per day and contracted until 2030.
Third-Party Focus Is Smart
Delek Logistics is shifting focus to third-party revenues, which is a positive development. This strategy diversifies cash flows, opens new growth avenues, and reduces dependence on Delek Holdings. According to their investor presentation, “50% of our EBITDA is from third-party business,” which strengthens confidence in the partnership’s stability and distribution sustainability.
Risks
Several risks could impact the company:
- Natural disasters, safety issues, or extreme market fluctuations could reduce demand for oil transportation and refining services.
- A long-term shift away from fossil fuels could lead to a decline in demand for Delek Logistics’ services.
- Dependence on Delek Holdings remains a concern. If Delek Holdings faces operational challenges, it could negatively impact Delek Logistics’ cash flows.
Perfect for Income Investors?
Delek Logistics offers sustainable distributions with a yield of around 10%, making it an attractive investment for income-focused investors. The partnership’s stable cash flows, long-term MVC provisions, and strategic shift towards third-party revenues provide a solid foundation for continued distribution payments.
Despite potential risks, the resilient business model and strong financial performance make Delek Logistics a compelling choice for investors seeking reliable income.
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