Permian Basin Expansions And Libby Complex Upgrades Will Improve Operational Capacity By 2025

Key Takeaways

• Expansion in the Permian and Delaware Basins boosts asset base, potentially growing revenue streams and operational capacity.
  
• Strategic financial initiatives, including unit buybacks and maintaining liquidity, aim to enhance earnings and overall financial health.
  
• High leverage, rising debt costs, and economic separation risks could strain financial flexibility, while capital projects and buyback strategies might pressure liquidity and future earnings.

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.

• Delek Logistics Partners has taken key steps to expand its services in the Permian Basin with the acquisition of assets such as the Wink to Webster pipeline and Midland Basin water midstream companies. This enhances its overall asset base, potentially increasing revenue streams from new services offered.
  
• The completion of the processing plant expansion in the Delaware Basin by the first half of 2025 and the implementation of acid gas injection and sour gas treating capabilities at the Libby Complex are poised to improve operational capacity, which could lead to higher revenues and margins.
  
• The company's strategic initiative to increase economic separation from its sponsor, DK, includes a $150 million buyback, potentially enhancing earnings per unit through a reduction in outstanding units.
  
• Delek Logistics anticipates significant EBITDA growth for 2025, with guidance indicating a 20% increase over 2024 levels, reflecting expectations of enhanced financial performance and increased cash flow.
  
• The focus on maintaining strong financial liquidity and optimal leverage, along with a robust pipeline of organic growth projects, supports the potential for improved net margins and overall financial health.

Delek Logistics Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Delek Logistics Partners's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.1% today to 25.4% in 3 years time.
• Analysts expect earnings to reach $267.2 million (and earnings per share of $5.03) by about March 2028, up from $141.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, down from 16.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.05%, as per the Simply Wall St company report.

Delek Logistics Partners Future Earnings Per Share Growth

Risks

• The decrease in Wholesale Marketing and Terminalling adjusted EBITDA due to lower wholesale margins and impact of intercompany transactions could pressure net margins and revenue stability.
  
• The capital expenditure for new projects, like the Libby processing plant expansion and growth and maintenance initiatives, high at $160 million, might strain liquidity and impact earnings if projects do not yield anticipated returns.
  
• High leverage due to ongoing acquisitions and growth projects, coupled with potential increases in the cost of debt financing, might negatively affect net earnings and financial flexibility.
  
• The $150 million buyback from its sponsor, if not funded effectively, could increase leverage or reduce free cash flow, impacting the company's ability to reinvest in growth and affecting future earnings.
  
• Risks inherent in the economic separation from its sponsor, DK, include potential operational and financial independence challenges that could impact revenue streams and net margins if not managed properly.

Valuation

• The analysts have a consensus price target of $44.75 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 $50.0, 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 2028, revenues will be $1.1 billion, earnings will come to $267.2 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 9.0%.
• Given the current share price of $42.77, the analyst price target of $44.75 is 4.4% 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.