Why Delek Holdings Rallied Big Today
Key Points
Delek released earnings results that came in ahead of Wall Street's expectations.
The small cap refiner is benefiting disproportionately from high jet fuel refining margins.
Management believes Delek's share price should be much higher based on its sum-of-the-parts.
Shares of Delek U.S. Holdings (NYSE: DK) rallied 15.1% on Wednesday as of 1:14 p.m. EDT.
The small refinery and oil and gas logistics company rallied on the back of better-than-expected earnings today, along with a relatively strong day for oil and gas names amid higher oil prices.
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Delek is benefiting from very jet fuel high refining margins amid the current macroeconomic environment. Moreover, the company is also undergoing some "self-help" with a large cost-cutting program, as well as the ongoing separation of its refining and logistics segments.
Delek delivers fuel for profits
In the first quarter, Delek grew revenue by 0.4% to $2.65 billion, with an adjusted (non-GAAP) loss per share of ($0.98).
While those numbers don't seem especially good, they were ahead of expectations. Notably, Delek's Big Spring refinery was down for maintenance in the quarter, which affected revenue and earnings in the short-term but positions the company for higher efficiency and margins going forward.
Not only is the Big Spring turnaround maintenance now complete, but Delek is also underway with a significant cost-cutting program. On the release, management announced it had increased its annualized cash flow savings from the program from $200 million to $220 million.
Delek also has a particularly advantageous position, with a higher proportion of its refining capacity dedicated to jet fuel yield than other refiners. Those margins are particularly high right now. The refining segment's adjusted EBITDA increased to $155.3 million, up massively from a $27 million loss in the year-ago quarter.
Image source: Getty Images.
Delek's management believes in more upside
In a slide on the presentation, Delek believes its "mid-cycle" adjusted EBITDA is around $545 million. Attributing a 4.5 times multiple to its refining operations, Delek believes its enterprise value should be about $2.45 billion -- a little below where it is now.
However, Delek also has other assets. Notably, Delek owns a 63% stake in Delek Logistics Partners (NYSE: DKL), which is worth another $1.71 billion at the current valuation.
Finally, Delek qualifies for small-refinery exemption payments (SREs) from the government, which help small refiners cover their high compliance costs. Those could increase adjusted EBITDA by $375 million to $750 million, depending on the number of SREs granted.
All in all, Delek's management believes the sum of these parts adds up to a stock price that's roughly double where Delek trades today, even after today's surge.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends Delek Us. The Motley Fool has a disclosure policy.