Refinery Upgrades And Cost Cutting Will Drive Future Profitability

Key Takeaways

• Improved operational performance and asset swaps enhance refinery profitability and revenue growth, positively impacting earnings and net margins.
  
• Strategic expansions and cost reduction efforts boost cash flow and profitability, driving shareholder value and financial performance improvement.
  
• Lower refining and marketing margins, goodwill impairment, and negative cash flows suggest potential financial strain, while market skepticism affects asset value perception.

Catalysts

Engages in the integrated downstream energy business in the United States.

• Improved operational performance and reliability at key refineries, including Krotz Springs and Big Spring, is expected to lead to higher throughput and stronger contributions in 2025. This will likely impact revenue growth and improve net margins.
  
• The Enterprise Optimization Plan (EOP) aims to enhance cash flow by $80 million to $120 million annually starting in the second half of 2025, leading to a substantial boost in profitability and improving earnings.
  
• The economic swap of assets between Delek US Holdings (DK) and Delek Logistics Partners (DKL) enhances refinery profitability, creates stronger cash flow for DKL, and gradually facilitates deconsolidation, which should positively affect earnings.
  
• Delek Logistics is expanding its Libby gas processing complex and investing in acid gas injection, which is aligned with growth in the Permian Basin. The expected completion in early 2025 should drive DKL EBITDA growth, contributing to DK shareholder value and net margins.
  
• Cost reduction initiatives, including a zero-based budget program that saved approximately $100 million, coupled with accretive acquisitions by DKL that added $100 million in third-party EBITDA, are expected to elevate DK's future profitability and enhance net margins.

Delek US Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Delek US Holdings's revenue will decrease by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.6% today to 0.9% in 3 years time.
• Analysts expect earnings to reach $98.2 million (and earnings per share of $1.61) by about April 2028, up from $-666.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $119 million in earnings, and the most bearish expecting $77.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from -1.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 2.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Delek US Holdings Future Earnings Per Share Growth

Risks

• Delek US experienced a net loss of $414 million in the fourth quarter of 2024, partly due to a $212 million partial impairment of goodwill and lower refining margins, which could pressure future earnings.
  
• The challenging refining margin environment, noted as being $6 below mid-cycle in the fourth quarter, reduced refining contribution significantly, impacting net margin and EBITDA performance.
  
• Supply and marketing contributed a loss of $34.6 million in the fourth quarter, driven by seasonal low demand and weak wholesale marketing margins, which negatively affects revenue and operational profitability.
  
• Delek US is significantly impacted by timing-related working capital movements amounting to approximately $71 million, which together with other financial activities, resulted in negative cash flow from operations of $164 million, implying potential difficulty in sustaining cash flow in adverse conditions.
  
• Despite strategic focus on deconsolidation and asset value realization, Delek Logistics continues to trade at a discount to peers, suggesting market skepticism that might hinder DK’s share price from reflecting perceived asset values and future profit potential.

Valuation

• The analysts have a consensus price target of $18.692 for Delek US Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.8 billion, earnings will come to $98.2 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 11.4%.
• Given the current share price of $11.55, the analyst price target of $18.69 is 38.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.