Sour Gas Corridor And Water Integration Will Constrain Future Utilization And Margin Potential

Catalysts

About Delek Logistics Partners

Delek Logistics Partners operates midstream energy assets focused on natural gas, crude oil and produced water services in the Permian Basin.

What are the underlying business or industry changes driving this perspective?

• The build out of sour gas treating, acid gas injection and gathering around the Libby Complex concentrates growth expectations on a single Permian gas corridor, so any slowdown in sour gas drilling or producer activity in that pocket could leave new capacity underutilized and limit the EBITDA contribution from recent growth capital.
• The company highlights produced water handling as an area needing new approaches as water cuts rise, yet integrating H2O and Gravity and then adapting to changing disposal requirements may require additional capital and operating spend that compresses net margins if pricing power in water services softens.
• Management expects the Delaware gas business to be a growth engine for years; however, the slower than anticipated ramp so far suggests future projects or expansions at Libby may not achieve targeted utilizations on the expected time frames, which could weigh on earnings growth relative to current expectations.
• Rising economic separation from sponsor DK, with about 80% of run rate EBITDA tied to third parties, increases exposure to competitive midstream contract terms and recontracting risk that may pressure tariffs or volumes over time and affect revenue stability.
• Ongoing growth capex for sour gas infrastructure, water systems and potential additional Libby processing trains, even with access to about US$940m of liquidity, could keep leverage and coverage ratios sensitive to any moderation in Permian volume growth and constrain distributable cash flow growth versus current run rate.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Delek Logistics Partners compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Delek Logistics Partners's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 16.0% today to 14.6% in 3 years time.
• The bearish analysts expect earnings to reach $166.7 million (and earnings per share of $3.15) by about July 2029, down from $169.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $331.9 million.
• 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 20.2x on those 2029 earnings, up from 17.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.8x.
• The bearish analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Management frames the Libby sour gas solution and AGI build as an urgent customer need in an area they describe as one of the most prolific parts of the Permian. If producer activity and sour gas volumes remain healthy, higher utilization of the 160 million scf per day Libby Complex could provide a longer term lift to Gathering and Processing revenue and segment EBITDA.
• The combination of gas, crude and water services in the Permian is presented as a stronger full suite offering. If producers increasingly prefer bundled midstream solutions in this basin, DKL's crude gathering, water handling and gas processing footprint could help support more stable volumes, which may underpin long run revenue and distributable cash flow.
• The integration of H2O Midstream and Gravity Water Midstream is described as largely complete and timed at what management considers attractive purchase multiples. If the expected synergies and larger water footprint are realized over several years as produced water volumes rise, this could support segment EBITDA and potentially improve net margins.
• Management highlights a record adjusted EBITDA of US$536 million in 2025, a 2026 EBITDA guidance range of US$520 million to US$560 million and 13 consecutive years of distribution growth. If this pattern of operational delivery and capital discipline continues, it may support investor confidence and influence earnings based valuation multiples.
• The rising economic separation from sponsor DK, with about 80% to 82% of run rate EBITDA tied to third parties, is framed as a positive step toward independence. If this leads to a broader customer base and more diversified contracts over time, it could reduce concentration risk and help stabilize revenue and EBITDA across cycles.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Delek Logistics Partners is $52.0, which represents up to two standard deviations below the consensus price target of $55.75. This valuation is based on what can be assumed as the expectations of Delek Logistics Partners'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 $60.0, and the most bearish reporting a price target of just $52.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $1.1 billion, earnings will come to $166.7 million, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 7.4%.
• Given the current share price of $55.31, the analyst price target of $52.0 is 6.4% lower. 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.