Shifting EV Demand And Cost Hikes Will Weaken Refining Operations

Key Takeaways

• Shifting regulations, fuel demand decline, and aging assets put Delek at a structural disadvantage versus diversified competitors, risking persistent earnings challenges and market share erosion.
  
• Increased costs from emissions controls, investor divestment, and capital constraints threaten long-term shareholder value and Delek's ability to effectively finance growth.
  
• Operational enhancements, financial discipline, and favorable industry dynamics are strengthening Delek's margins, cash flow, and stability, supporting potential share price gains and resilient earnings.

Catalysts

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

• The accelerating adoption of electric vehicles and increasingly stringent fuel efficiency standards are set to directly erode gasoline and diesel demand in Delek's core Sun Belt and Midcontinent markets, threatening to drive long-term declines in fuel sales volumes and compressing top-line revenue for the company.
  
• Mounting regulatory pressure to reduce carbon emissions, phase out fossil fuels, and heighten environmental compliance will require escalating capital outlays on emissions controls and renewable blending, driving up operating and maintenance costs while reducing net margins and diminishing future free cash flow conversion.
  
• Delek's relatively small scale, aging refining asset base, and limited exposure to high-growth segments like renewables or petrochemicals will leave the company structurally disadvantaged versus larger, diversified competitors as fossil fuel demand contracts-leading to sustained earnings headwinds and increasing risk of periodic net losses.
  
• Rising ESG investment mandates and global investor divestitures from fossil fuel assets are projected to steadily increase Delek's long-term cost of capital and constrain avenues for growth financing, further pressuring balance sheet flexibility and threatening long-term shareholder value through dilution or higher interest expenses.
  
• Heightened volatility in crude prices and refined product spreads, compounded by the risk of domestic overcapacity if larger peers aggressively invest in next-generation technologies, could translate into shrinking market share, greater earnings variability across cycles, and chronic underperformance in return on invested capital for Delek US Holdings.

Delek US Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Delek US Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Delek US Holdings's revenue will decrease by 3.7% annually over the next 3 years.
• The bearish analysts are not forecasting that Delek US Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Delek US Holdings's profit margin will increase from -8.0% to the average US Oil and Gas industry of 15.0% in 3 years.
• If Delek US Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $1.4 billion (and earnings per share of $30.18) by about August 2028, up from $-863.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 0.6x on those 2028 earnings, up from -1.5x today. This future PE is lower than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 6.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.3%, as per the Simply Wall St company report.

Delek US Holdings Future Earnings Per Share Growth

Risks

• The company is achieving significant improvements through its Enterprise Optimization Plan, which is delivering higher-than-expected cost reductions and margin enhancements, indicating that net margins and free cash flow could continue to expand in the years ahead.
  
• Delek's logistics and midstream segment is showing strong adjusted EBITDA growth, with a growing portion of third-party business and high liquidity, which is likely to provide more stable and diversified earnings, thus enhancing earnings stability and cash generation.
  
• The refining system is experiencing record throughput levels and operational improvements, with management identifying further process efficiency gains and commercial optimization, suggesting the potential for rising production volumes and stronger top-line revenue.
  
• Management's disciplined and shareholder-friendly capital allocation, including sizeable dividends and share repurchases, is underpinned by a strong balance sheet and improving reliability, which could lead to higher returns for shareholders and positive momentum for the share price.
  
• Regional and industry dynamics such as underinvestment in North American refining capacity, persistent fuel demand in Delek's operating regions, and robust asphalt demand from infrastructure spending provide structural support for resilient revenue and margins, potentially contradicting a long-term decrease in share price.

Valuation

• The assumed bearish price target for Delek US Holdings is $14.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Delek US Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $9.7 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 0.6x, assuming you use a discount rate of 11.3%.
• Given the current share price of $21.76, the bearish analyst price target of $14.0 is 55.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.