Delek US Holdings: Recovery Finally Underway, Dividends Should Return In 2022
Summary
- After facing a very tough time since the beginning of 2020, it appears a recovery is finally underway for Delek US Holdings.
- Their operating cash flow is trending higher and when removing the temporary impacts of working capital movements, it reached the highest level since the beginning of 2020.
- This has helped push their net debt lower and keep their leverage only moderate with further decreases likely in 2022, which should allow for their dividends to return.
- Whilst management is currently remaining cautious about reinstating their dividends, this will likely change as the recovery continues as hoped.
- Although the recent fears surrounding the new Omicron Covid-19 strain could derail this recovery, I still believe that upgrading my rating to bullish from neutral is now appropriate.
MicroStockHub/iStock via Getty Images
Introduction
After facing a very tough 2020, Delek US Holdings (NYSE:DK) was seeing positive signs of a recovery in early 2021 despite not being out of the proverbial woods, as my previous article discussed. This article provides a follow-up analysis of their financial performance since the end of the first quarter of 2021, which sees a recovery finally underway and raises hopes that their dividends should return in 2022.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
Image Source: Author.
Detailed Analysis
Image Source: Author.
Instead of simply assessing dividend coverage through earnings per share, I prefer to utilize free cash flow since it provides the toughest criteria and best captures the true impact on their financial position. The extent that these two results differ will depend upon the company in question and often comes down to the spread between their depreciation and amortization to capital expenditure.
When lastly reviewing their cash flow performance following the first quarter of 2021, they were still not out of the proverbial woods with tough operating conditions persisting that saw their operating cash flow at negative $34m for the first quarter. Thankfully their operating cash flow for the first nine months of 2021 increased to $210m and thus marks a very positive inflection point after one and half years of difficult operating conditions that saw negative operating cash flow of $400m during the first nine months of 2020. It also marks the beginning of a very positive trend for their operating cash flow and thus it appears that a recovery is finally underway, as the graph included below displays.
Image Source: Author.
It can be seen that whilst their operating cash flow of $75m for the third quarter of 2021 decreased versus the second quarter, when removing temporary working capital movements, their underlying result of $132m is the highest since the beginning of 2020 when this severe downturn began. Even more importantly, this does not appear to be a random one-off spike because it builds on the first and second quarters of 2021 that themselves were improvements versus the fourth quarter of 2020 when this downturn appears to have bottomed.
If their underlying operating cash flow of $132m for the third quarter of 2021 is annualized, it equals $528m and thus leaves free cash flow of $321m if removing their capital expenditure guidance for 2021 of $207m, as per slide eight of their third quarter of 2021 results presentation. Whilst only a preliminary estimation, this indicates that their shares are trading with a massive free cash flow yield of approximately 28% given their current market capitalization of $1.16b. Whilst this tentatively shows that they have ample free cash flow to reinstate dividends they are still remaining cautious, as per the commentary from management included below.
“… we don’t want to reinstate the dividend too soon and then change our mind.”
-Delek US Holdings Q3 2021 Conference Call.
Since this recovery is still only just beginning, their caution is understandable but as 2022 progresses and their recovery hopefully continues, it seems reasonable to expect that management will gain the confidence to reinstate their dividends, providing that their financial position remains healthy. The risk remains that the recent fears surrounding the new Omicron Covid-19 strain end up derailing this recovery, although given its highly unpredictable nature, this simply remains a wait-and-see risk.
Image Source: Author.
Whilst their completely suspended dividends are painful for investors, at least it allows their recovering cash flow performance to push their net debt lower by 11.56% to $1.392b versus their previous level of $1.574b at the end of the first quarter of 2021. Due to their highly volatile earnings throughout 2020 and the first nine months of 2021 that have only just begun recovering, it temporarily renders their leverage ratios rather useless.
If their underlying operating cash flow of $132m during the third quarter of 2021 is annualized to $528m, it gives them a net debt-to-operating cash flow of 2.64, which sits within the moderate territory of between 2.01 and 3.50. This is quite positive when considering that the recovery has only just begun and thus their leverage should continue decreasing in 2022 as their financial performance continues improving and their net debt continues decreasing in tandem, thereby supporting their ability to reinstate their dividends.
Image Source: Author.
Their liquidity has remained strong since the end of the first quarter of 2021 with their current ratio at 1.08 versus its previous result of 1.16 and their cash ratio virtually unchanged at 0.30 versus its previous result of 0.32, thereby further supporting their ability to reinstate their dividends. Their debt structure also remains favorable since the majority of their debt resides within their term loan credit facility that does not mature until 2025 with all other maturities being less than their current cash balance of $831m, as the table included below displays. This relieves any refinancing pressure within the coming years and given the remaining $721.7m undrawn balance in their revolving credit facility, they have additional capital on tap if required.
Image Source: Delek US Holding Q3 2021 10-Q.
Conclusion
Whilst management is cautious about reinstating their dividends prematurely, thankfully it appears that a recovery is finally underway and given their healthy financial position, it stands to reason that 2022 should see their dividends return. Even though the recent fears surrounding the new Omicron Covid-19 strain could derail this recovery, I still believe that upgrading my rating to bullish from neutral is now appropriate.
Notes: Unless specified otherwise, all figures in this article were taken from Delek US Holdings’ SEC filings, all calculated figures were performed by the author.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (9)
This year supposed to be big snap back for oil & gas industry (refiners in particular). Betting on DK and peers recovery. Cheers ))
