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Bull of the Day: Delek US Holdings (DK)

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As U.S. oil production continues to boom, more and more rigs are coming online.  According to the Baker Hughes active U.S. rig count, total rigs have increased from 414 on June 9, 2016 to 927 on June 9, 2017.  A large portion of these rigs are coming from one area, the Permian Basin where the rig count has jumped up from 142 to 368 over the same time period.  With all of this increased production, someone needs to refine this oil, and that is where our Zacks Bull of the Day Delek US Holdings (DK - Free Report) comes into the picture.  

This Zacks Ranked #1 (Strong Buy) company is a diversified energy business focused on petroleum refining, marketing and supply of refined products, and retail marketing of fuel and general merchandise.

Acquisition Update

In the early part of 2017, Delek announced that they were going to acquire Alon USA in an all-stock transaction.  The deal remains on track to close on July 1, 2017.  With the addition of Alon the new enterprise value of DK is expected to reach $3 billion, have a total refining capacity of about 300 million barrels per day, and have increased exposure to the Permian Basin.  Further, management is expecting between $85 and $105 million in synergies by 2018.  

Management’s Take

According to Uzi Yemin, Chairman, President, CEO, "Late in the first quarter, we experienced improving market conditions as the Gulf Coast 5-3-2 crack spread increased and Midland sourced crude moved to a discount to Cushing as we entered the second quarter.  The improving drilling activity and crude oil production in the Permian Basin has several positive effects on our operations. There is the potential for our refining operations to benefit from a widening discount of Permian sourced crude to Cushing and improved economics for crude gathering as crude oil production rises. Our logistics segment has the potential to benefit through its west Texas wholesale business and the Paline Pipeline where volume should improve as wider crude discounts support shipping economics on that pipeline."

Yemin concluded, "We remain focused on creating long-term shareholder value as we take the next step in the growth of Delek US. We were pleased with Alon's first quarter results and the transaction to acquire the remaining outstanding common stock of Alon that Delek US does not already own is moving forward. As part of the process we received FTC clearance in April and, based on current plans subject to regulatory and shareholder approval, we expect to close on or about July 1.  The combined refining company will have approximately 300,000 barrels per day of crude throughput capacity and current logistical access to approximately 200,000 barrels per day of Permian Basin sourced crude. If successful we expect to create approximately $95 million of annual synergies beginning in 2018 and should be able to unlock approximately $78 million of logistics EBITDA through future potential dropdowns to Delek Logistics from this transaction."

Price and Earnings Consensus Graph

As you can see in the graph below, the stock price dipped as the price of oil fell in 2016, but given their exposure to the Permian Basin, and the stabilization of oil prices, the stock price and future earnings estimates have rebounded in 2017.

Delek US Holdings, Inc. Price and Consensus

Delek US Holdings, Inc. Price and Consensus | Delek US Holdings, Inc. Quote

Increasing Earnings Estimates

Due to the increased exposure to the Permian Basin, and the recent acquisition earnings estimates for Q2 17, Q3 17, FY 17, and FY 18 have all seen significant upgrades over the past 60 days; Q2 17 improved from -$0.10 to $0.13, Q3 17 jumped up from -$0.03 to $0.09, FY 17 rose from -$0.55 to -$0.17, and FY 18 almost tripled from $0.19 to $0.56.

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