Delek Logistics Partners, LP (NYSE:DKL) reported results for the second quarter 2014 (SEC filing, press release, earnings call). Net income reached $21.8M, or $0.87 per diluted limited partner unit, compared to $0.47 a year ago, up 85% Y/Y. Distributable cash flow was $24.0M versus $12.8M a year ago, up 87% Y/Y. Revenue was $236.3M, up 2.6% Y/Y while contribution margin soared from $16.1M to $30.2M, up 87% Y/Y and contribution to the lion's share of the net income growth Y/Y. Therefore, the net income growth going forward will probably reach lower annual rates if margin expansion slows down. Several acquisitions contributed to this growth, as well as higher margins in the west Texas wholesale business and increased volumes in the Lion Pipeline System. The distributable cash flow coverage ratio was 2.0 times, giving DKL great flexibility to increase operations and distributions going forward. The latest declared quarterly distribution is $0.475 per limited partner unit. The 20.3% Y/Y distribution growth will trigger incentive distribution rights payments to the general partner for the first time.
In terms of specific segments and facilities, contribution margin for the Wholesale Marketing and Terminalling segment was $16.0M, up 122% from $7.2M a year ago, driven by an increase in contribution margin as well as acquisitions. In west Texas, despite falling throughput, contribution margin rose Y/Y due to favorable supply/demand as several refineries had downtimes during the quarter. Only $1.1M came from renewable identification numbers (RINs) representing just $0.68 per barrel compared to $1.23 per barrel a year ago. Terminalling throughput volume surged on acquisitions, and volume under the east Texas marketing agreement with Delek US (NYSE:DK) was 61,231 barrels per day compared to 64,973 barrels per day during the second quarter 2013. The Pipeline and Transportation segment's contribution margin of $14.2M improved from $8.9M Y/Y, primarily thanks to storage fees associated with the newly purchased Tyler and El Dorado tank farms. Crude oil (non-gathered) transported on the Lion Pipeline system increased to 59,038 barrels per day in the second quarter 2014 from 49,270 barrels per day in the prior year period. Refined product volume on this system experienced a similar increase.
My original thesis stated that DKL is an excellent investment for investors seeking high and stable income with strong growth prospects. The thesis worked well, with DKL's cash distributions reaching a 4.36% trailing-twelve-month annualized yield and a 4.9% annualized yield based on current-quarter distribution of $0.48 per limited partner unit. DKL increased its cash distributions by 20% Y/Y. The stock itself returned roughly 11% since my call, so the total return is ~15.5% in just over a year. I reiterate my long thesis because I expect the positive trends of distribution increases and stock appreciation to continue, although at a slower rate than in the past year as some of the trends were one-time in nature. On the other hand, income from the RINs could spike back up. My target price is ~$40 per share, offering a ~11% upside within 12 months, plus the ~5% cash distribution yield, for a total return of 16%.
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