Fueling Future Growth With Tactical Moves And Enhanced Gas Processing Efficiency

Key Takeaways

• Strategic acquisitions and expansions are expected to improve asset quality, offering cross-sell opportunities that could boost future revenue.
  
• Disciplined capital allocation, with managed leverage, supports dividend growth potentially enhancing earnings per share.
  
• The company's financial stability and profitability face risks from low coverage ratios, declining segment margins, capital expenditures, market reliance, and acquisition execution challenges.

Catalysts

Provides gathering, pipeline, transportation, and other services for crude oil, intermediates, refined products, natural gas, storage, wholesale marketing, terminalling water disposal and recycling customers in the United States.

• Recent strategic acquisitions, such as Delek's portion in the Wink to Webster Pipeline and H2O Midstream, are expected to improve asset quality and offer cross-sell opportunities, potentially boosting future revenue.
  
• The expansion of the gas processing plant, set to complete in the first half of 2025, should increase capacity and efficiency, likely leading to higher earnings.
  
• Progress in sour gas treatment presents new revenue opportunities in the Delaware Basin, potentially improving net margins due to niche service expansion.
  
• Increased acreage dedication, notably in the Midland Basin, is expected to drive volume growth, positively impacting future revenue.
  
• The company’s disciplined capital allocation strategy, alongside managing leverage and liquidity, supports ongoing dividend growth, which could enhance earnings per share (EPS).

Delek Logistics Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Delek Logistics Partners's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.5% today to 22.4% in 3 years time.
• Analysts expect earnings to reach $253.7 million (and earnings per share of $4.45) by about November 2027, up from $130.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2027 earnings, down from 15.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.4x.
• Analysts expect the number of shares outstanding to grow by 3.46% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.65%, as per the Simply Wall St company report.

Delek Logistics Partners Future Earnings Per Share Growth

Risks

• The company's distribution coverage ratio is currently at 1.1x, below its long-term objective of 1.3x, which may indicate potential pressure on ability to sustain or increase distributions as expected, impacting potential earnings growth.
  
• The Wholesale Marketing and Terminalling segment experienced a decline in adjusted EBITDA due to lower wholesale margins, which poses a risk to revenue and profitability if these trends persist.
  
• With significant capital expenditures on the new gas processing plant and planned spending, there is a risk that cost overruns or delays could affect profitability and return on investment.
  
• The reliance on continued access to debt and equity markets for maintaining liquidity suggests a vulnerability to changes in credit conditions, which could affect financial stability and net margins.
  
• Recent acquisitions and integration efforts such as H2 Midstream present execution risk, where failure to efficiently integrate and capitalize on synergies could adversely impact financial performance and projected revenue growth.

Valuation

• The analysts have a consensus price target of $43.0 for Delek Logistics Partners 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 $46.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $253.7 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $39.5, the analyst's price target of $43.0 is 8.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.