Delek US Holdings, Inc. DK has evolved significantly since the 2017 acquisition of Alon USA Energy, positioning itself as a Permian-focused, diversified downstream energy company. This strategic shift has opened up opportunities for earnings growth, particularly as 70% of Delek’s refining capacity benefits from lower Permian pricing.
Let us explore the key drivers currently supporting Delek stock, as well as the risks that could affect its performance.
Factors Favoring DK Stock
Strategic Focus on Deconsolidation: Delek is actively working on deconsolidating its midstream segment, Delek Logistics Partners DKL, to unlock value for the company’s shareholders. By reducing DK’s ownership in DKL while retaining significant cash flow benefits, the company aims to optimize its financial structure and enhance the standalone valuation of both entities.
Strong Performance in Logistics Segment: Delek Logistics, the midstream arm of the company, achieved a record EBITDA of $106.1 million in third-quarter 2024. The segment benefited from strong contributions from Delaware Gathering systems, annual rate increases and the strategic Wink-to-Webster pipeline dropdown. The company’s continued investment in midstream infrastructure not only provides a stable revenue stream but also enhances its ability to serve third-party customers, which is crucial for scalability.
Focus on Shareholder Value Creation: Despite the challenges in the refining environment, Delek has demonstrated its commitment to returning value to the company’s shareholders. During third-quarter 2024, the company paid $16.4 million in dividends and executed $20 million in share buybacks. Furthermore, it announced a regular quarterly dividend of 25.5 cents per share for fourth-quarter 2024, signaling a steady capital allocation strategy to reward investors.
Strategic Capital Allocation: Delek’s balanced capital allocation strategy, which includes dividends, share buybacks and growth investments, indicates its efforts to deliver both short-term shareholder returns and long-term value creation. The reduction in planned capital expenditures by $80-$100 million for 2025 highlights its adaptability to market conditions without compromising operational efficiency.
While Delek has solid growth prospects, several challenges could pose risks to its performance.
Delek US Holdings: Cautionary Factors
Weak Refining Margins and Operating Results: The refining segment, a core business area for DK, posted a significant decline in adjusted EBITDA to $10.2 million in third-quarter 2024 from $296.1 million in third-quarter 2023. This sharp decline was caused by a 49.1% year-over-year drop in benchmark crack spreads, highlighting the volatility and sensitivity of this business to external market conditions. Lower refining margins severely impacted the company’s profitability.
Earnings Volatility Due to Commodity Price Fluctuations: DK operates in a commodity-intensive industry, where fluctuations in crude oil prices and refining margins significantly impact earnings. While the logistics segment provides some stability, the refining business remains highly exposed to market volatility.
High Leverage and Debt Load: As of Sept. 30, 2024, Delek had consolidated long-term debt of $2.79 billion, resulting in a net debt position of $1.75 billion. Such high leverage could pose significant risks if the refining margin environment remains weak or interest rates rise further. Moreover, a substantial portion of the company’s cash flow is required to service this debt, limiting its ability to reinvest in growth opportunities.
Limited Growth in the Core Refining Segment: Unlike the logistics segment, the refining business has shown limited growth due to declining margins and operational setbacks. In third-quarter 2024, total throughput at key refineries like El Dorado and Big Spring remained below expectations. The inability to capitalize on existing refining capacity could hinder the company’s ability to compete effectively.
Final Thoughts for DK Stock
Delek US Holdings shows strong performance in its logistics segment, with record EBITDA and ongoing investment in midstream infrastructure supporting long-term growth. DK focuses on deconsolidating its midstream unit and returning value to the company’s shareholders through dividends and share buybacks. However, weak refining margins, high debt and earnings volatility from fluctuating commodity prices pose risks to its profitability and growth potential. Given this mix of strengths and potential challenges, investors should consider adopting a hold strategy for now, waiting for a more opportune entry point before adding this stock to their portfolios.
Zacks Rank and Key Picks
Currently, DK has a Zacks Rank #3 (Hold).
Investors interested in the energy sector might look at some better-ranked stocks like TechnipFMC FTI and Oceaneering International OII, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
TechnipFMC is valued at $12.38 billion. In the past year, its shares have risen 42.9%. London-based FTI is a leading manufacturer and supplier of products, services and fully integrated technology solutions for the energy industry.
Oceaneering International is valued at $2.53 billion. In the past year, its shares have risen 13.6%. OII is one of the leading suppliers of offshore equipment and technology solutions to the energy industry.
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Delek Logistics Partners, L.P. (DKL) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
