Why Is Delek Stock Falling?

Delek US Holdings (DK) stock has fallen by 2% in July month-to-date. The stock fall could be in anticipation of the company’s second-quarter earnings. Delek will post results on August 5.

Peers Valero Energy (VLO) and PBF Energy (PBF) stocks have fallen by 1% and 12%, respectively, in the month. However, Phillips 66 (PSX) stock has risen by 9% while Marathon Petroleum (MPC) stock has stood flat.

Analysts expect Delek’s EPS to fall by 38% YoY and 45% quarter-over-quarter to $0.84 in the second quarter of 2019. In the first quarter of 2019, the company’s adjusted EPS of $1.54 exceeded Wall Street analysts’ mean estimate of $0.47. The company’s net adjusted income attributable to its shareholders rose from a loss of $40 million in Q1 2018 to a profit of $149 million in Q1 2019. The rise was due to an increase in Refining and Logistics’ contribution margin partly offset by a fall in Retail margin.

Further, analysts expect the company’s revenues to fall by 13% YoY to $2.2 billion in the second quarter. In the first quarter, Delek’s revenue fell by 7% YoY to $2.2 billion.

Analysts expect peers Marathon Petroleum’s (MPC) and Valero Energy’s (VLO) EPS to fall by 40% and 36%, respectively, in the second quarter. They expect PBF Energy’s (PBF) and Phillips 66’s (PSX) earnings to fall by 35% YoY and 2% YoY, respectively. However, analysts expect Holly Frontier’s (HFC) EPS to rise by 12% YoY to $1.62 in Q2 2019.

In the second quarter, refiners’ margin indicators have put up mixed cues. The US Gulf Coast WTI 3-2-1 crack widened, but oil spreads like the Canadian differential and Midland spread narrowed. Further, Holly Frontier’s (HFC) refining indexes rose, Valero Energy’s (VLO) main refining crack indicators fell, and Marathon Petroleum (MPC) indicators showed a mixed performance.

Delek’s refining segment contribution margin rose from $133 million in Q1 2018 to $294 million in Q1 2019. The margin rose due to higher Brent-Midland spread and lower RIN (renewable identification numbers) cost. Delek’s Krotz Springs refinery performed better as it benefited from its crude slate.

Delek’s refining margins rose across its operating regions. The company’s adjusted refining margin at Krotz Spring refinery rose by 335% YoY to $11.0 per barrel in the first quarter. The area processed 29% of Delek’s throughput in the quarter. The margin at Big Spring, which refined 28% of Delek’s throughput, rose 84% YoY to $17.7 per barrel in the first quarter.

The margin at Tyler, which refined 27% of DK’s throughput, rose 173% YoY to $16.2 per barrel in the first quarter. Also, the margin at El Dorado refinery rose 353% YoY to $12.7 per barrel in the quarter. The region processed 16% of Delek’s total throughput.

In the second quarter, USGC WTI 3-2-1 rose 9% YoY to $20 per barrel. However, oil spreads fell in the quarter. WTI Cushing–WTI Midland fell by 71% YoY while WTI-WCS spread fell by 30% YoY in the quarter. The fall in these oil spreads could dent Delek’s refining margins and earnings in the second quarter.

Plus, Delek’s peers’ refining margin indicators were mixed in the second quarter. In the quarter, Holly Frontier’s Rockies, Midcon, and Southwest refining indexes rose 12%,10%, and 4% YoY, respectively, which could boost its refining earnings. However, in the second quarter, Valero Energy’s crack indicators fell in the US Gulf Coast and North Atlantic, which accounted for about 75% of its throughput. While Marathon Petroleum’s sweet and sour differentials fell 20% and 74% YoY, its blended crack rose 17% YoY in the second quarter.

15 Wall Street analysts have covered Delek US Holdings (DK). Among the analysts, seven or 47% rated it a “buy” or “strong buy,” another seven analysts rated it a “hold,” and one analyst rated it a “sell.” In July, Cowen and Company raised its target price on Delek stock from $46 to $49. However, Goldman Sachs cut its target price on the stock from $37 to $36. Also, RBC lowered its target price on Delek stock from $39 to $38. Delek’s mean target price is $45 per share, which implies a 13% gain from the current level.

Delek’s peers Marathon Petroleum (MPC) and Valero Energy (VLO) have been rated as a “buy” by 94% and 84% of the analysts, respectively. Phillips 66 (PSX), HollyFrontier (HFC), and PBF Energy (PBF) have been rated as a “buy” by 72%, 18%, and 50% of the analysts, respectively.

Analysts have mixed opinions on Delek likely due to its better financials and capex but higher debt. Delek has more debt in its capital structure. The company’s total debt-to-capital ratio was 48% in the first quarter—the highest among its peers. Valero Energy, HollyFrontier, and Phillips 66 had ratios of 32%, 27%, and 30%, respectively, in the first quarter.

However, Delek’s financials are improving. Since the second quarter of 2018, the company has reported positive earnings. Further, Delek is expanding its midstream asset base and refining flexibility.

According to Delek, its current earnings model and midstream developments have the potential to make annual EBITDA of over $1 billion. The company’s adjusted EBITDA was $238 million in the first quarter. Delek just got its alkylation unit at Krotz Spring operational, which adds incremental annual EBITDA of $50 million. The refining initiatives, midstream projects, and regulatory benefits should also add to the company’s EBITDA.