Delek US Stock: Rising oil price, M&A could send stocks flying (NYSE: DK)

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Delek US Holdings (DK) not only completed several projects in 2021, but the company also plans to open new stores in 2022 and invest in its Permian Gathering business. With the oil price rising rapidly, I don’t think analysts have had time to update their estimates. In my opinion, if the price of refined products increases and DK makes new accretive acquisitions, future FCF margins will likely increase. I don’t believe the current stock price really represents the future FCF. DK seems undervalued.

Delek US Holdings Announces Completion of Projects and New Stores for 2022

Delek US Holdings is an integrated downstream energy company involved in the refining, transportation, storage and distribution of crude oil and refined products.

Delek US Holdings, Inc. came to my attention because it made a significant number of projects in 2021 and intends to invest nearly $260 million in new stores, among other business projects. In my opinion and according to other analysts, free cash flow will most likely increase as new projects are completed:

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I believe that in 2020 and 2021, shareholders have already experienced an increase in adjusted EBITDA. With the rapid increase in the price of oil, the completion of new projects and the opening of new stores, in my opinion, Delek’s EBITDA will probably tend to increase:

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The accumulation of cash thanks to increases in EBITDA and FCF is another clear proof of soft times for Delek US Holdings. Notice how cash has grown almost 9-10% over the past two years. With planned capital expenditures of $250-260 million, Delek US Holdings has a significant amount of cash to pay for capital expenditures. Most investors like to give money to companies that already have it:

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Market Estimates and Stock Price Response to Oil Price Increases

Analysts forecast sales growth between 3% and 4% in 2022 and 2023, an EBITDA margin of 2% to 3% and 2023 investments exceeding $222 million. Outstanding shares are expected to remain around 74 million:

Estimates

Estimates

I don’t know if analysts have looked at the recent increase in the price of oil. In my view, in the coming months, when analysts factor in the recent surge in oil prices, revenue forecasts and future free cash flow may increase. In the same way, the stock price of the company may also increase. Notice how in the past, whenever the price of oil went up, the stock price of Delek US Holdings also went up:

Y-Charts

Y-Charts

Under normal circumstances, the fair price would remain close to $31

Among the company’s strategic priorities, I would highlight two objectives, which can increase sales growth. First, if management is successful in profiting from its stake in Delek Logistics, liquidity will likely increase:

Launching a program to monetize a portion of our stake in Delek Logistics under a Rule 10b5-1 program to sell up to 434,590 common limited partner units, which helped us not only capture 2.1 million dollars (pre-tax) of tangible value to date in Delek’s valuation, but also serves to enhance the liquidity of Delek Logistics units without diluting Delek Logistics’ overall market capitalization. Source: 10-K

I would also expect a big increase in FCF margin as Delek wants to integrate his company and all of its subsidiaries into one strategy. Furthermore, if management successfully bets on synergistic discipline, automation and innovation, we could also see an increase in operating margins:

To transform our corporate and operating culture into “One Delek” through the unification of purpose, vision and strategy with a focus on cultural sustainability. Source: 10-kTransforming our refining operations into the “refining of the future” based on automation, innovation and synergistic discipline. Source: 10-K

I have used the median sales growth and median EBITDA margin seen in previous financial figures, which I consider to be very conservative. The resulting numbers include sales of $13 billion in 2027 and EBITDA of $517 million in 2027. If we also use an effective tax of 22%, the 2027 NOPAT would be close to $194 million. Finally, assuming 2023 investments of $222 million and 2023 working capital changes of $331 million, 2027 FCF would be $444 million:

My expectations

My expectations

Y-Charts

Y-Charts

With a WACC of 7.6%, the sum of FCF from 2022 to 2027 equals $1.58 billion. If we assume debt of $2.67 billion, cash of $856 million, and an exit multiple of 6.2x, the sum of TV plus cash and minus debt is $1.3 billion. . Finally, the implied price would be $31.8:

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My expectations

My expectations

The best scenario would include more mergers and acquisitions

With a significant amount of cash on the balance sheet and deep expertise in M&A markets, Delek US Holdings will likely try to grow through acquisitions. If management finds the right targets and negotiates a good transaction price, EBITDA and FCF should increase. As a result, I expect an increase in the fair price of Delek:

Historically, we have grown through acquisitions in all of our segments. Our business strategy has focused on capitalizing and growing our integrated business model in a way that allows us to participate in all phases of the downstream production process, from transporting crude oil to our refineries to transforming it into refined products to the sale of fuel to retail customers at the pump. Source: 10-K

10-k

10-k

In this scenario, I assumed 5% sales growth from 2023 to 2027 and an EBITDA margin of 5%. Considering the price of oil has gone from under $50 to over $100 in less than three years, my numbers don’t seem that high. With an effective tax of 22%, the NOPAT 2027 would be 392 million dollars, and we would be talking about 2027 FCF of 1.15 billion dollars:

My expectations

My expectations

With a WACC of 5% and an exit multiple of 6.55x, the sum of FCF from 2022 to 2027 would be $4 billion, and the implied fair price could be close to $80:

My expectations

My expectations

Risks from a decline in the spread of crack, regulations and enforcement of ethanol and biodiesel

If the crack spread decreases in the coming years, Delek US Holdings could come under significant pressure on its FCF margins. A drop in the price of oil or a rise in the market price of refining products could lower the company’s refining margin:

Our earnings, cash flow and profitability of our refining operations are primarily determined by the difference between the market price of refined products and the market price of crude oil, which often move independently of each other and are called crack spread, refining margin or refined product margin. Source: 10-K

New regulatory frameworks or new environmental regulations could adversely affect the company’s ability to operate. On the other hand, if management needs to increase capital expenditure to comply with new regulations, or needs to hire more staff, FCF margins could also decline:

Continued compliance with or violation of laws, regulations and other requirements could also have a material adverse effect on our business, financial condition and results of operations. We are exposed to future claims and lawsuits relating to environmental matters, including, but not limited to, contamination of surface water, groundwater and wetlands, air pollution, personal injury and property damage allegedly caused by substances we have manufactured, handled, used, released. or willing. We are, and have been, the subject of various state, federal and private proceedings regarding environmental regulations, requirements and investigations. Source: 10-K

Consistent with the previous risk, Delek US Holdings could also experience lower demand if regulators mandate ethanol and biodiesel consumption. As a result, in my view, Delek US Holdings could see a decline in revenue and FCF margins if the price of refined products declines:

While regulatory initiatives have necessitated an increase in the consumption of renewable transportation fuels, such as ethanol and biodiesel, consumer acceptance of electric, hybrid and other alternative vehicles is growing. Increased use of renewable fuels and alternative vehicles could lead to reduced demand for petroleum-based transportation fuels. The increased use of renewable fuels may also result in an increase in transportation fuel supply relative to a decline in demand and a corresponding decline in margins. Source: 10-k

In this scenario, I assumed a sales growth of 1% to 2% from 2022 to 2027, an EBITDA margin of 4.5% to 5.55% and an effective tax of 22%. The results include a 2027 FCF of $8.7 billion and an implied price of $10:

My expectations

My expectations

The total amount of debt is not small, but with 2027 FCF of 1 billion, the leverage does not seem worrying

As of December 31, 2021, Delek US Holdings, Inc. reports cash of $856 million and an asset/liability ratio of 2.53x. The balance sheet looks healthy. However, investors should pay close attention to the total amount of debt:

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In the latest report, Delek US Holdings noted short-term debt of $92 million, bonds worth $487 million, current portion of lease debt of $53 million, and long-term debt. term of $2.125 billion. I think DK has a large debt, but management will most likely be able to pay. A simulation with my FCF expectations implied that management would pay all debts by 2027:

My expectations

My expectations

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Conclusion

Delek US Holdings has completed a few projects very recently and management expects to launch new projects in 2022. Management and analysts believe that sales growth will continue in the coming years. Additionally, with the recent increase in the price of oil, I believe shareholders could benefit from increased FCF margins as the price of refined products rises. If we also assume some acquisitions like those signed in the past, the implied fair price should be higher than the current market price. Yes, I believe Delek US Holdings, Inc. is a buy.

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