Executive Summary / Key Takeaways

• Delek US Holdings is executing a multi-faceted strategic transformation, dubbed "Sum of the Parts," aimed at unlocking value embedded within its integrated downstream business by optimizing its portfolio and increasing the independence of its logistics segment.
• Recent transactions, including the sale of the retail business and strategic asset transfers with Delek Logistics, are enhancing financial flexibility, increasing third-party contributions at DKL, and positioning DK for potential deconsolidation.
• The Enterprise Optimization Plan (EOP), a self-help initiative targeting at least $120 million in annual cash flow improvement by the second half of 2025, is progressing well and is expected to structurally improve profitability and free cash flow generation independent of market conditions.
• Despite a challenging refining margin environment in Q1 2025, operational improvements and successful maintenance activities are positioning the refining segment for stronger performance, supported by specific initiatives like enhancing jet fuel production at El Dorado.
• Delek Logistics is poised for significant growth, guided to $480 million to $520 million in EBITDA for 2025, driven by recent accretive acquisitions in water disposal/recycling and organic growth in natural gas processing in the Permian Basin, further diversifying DK's earnings streams.

A Downstream Energy Evolution

Delek US Holdings operates as an integrated downstream energy company, primarily engaged in petroleum refining and the logistics associated with crude oil, intermediate, and refined products, alongside a growing presence in wastewater processing and recycling. Its historical journey has seen it build a portfolio of refining assets across the south-central U.S. and establish a publicly traded logistics arm, Delek Logistics Partners (DKL), to support these operations. In recent years, recognizing the distinct value propositions within its segments, Delek embarked on a significant strategic transformation to optimize its structure and unlock shareholder value.

This strategic pivot, often referred to as the "Sum of the Parts" initiative, aims to create a more focused and financially robust entity. It involves divesting non-core assets, strategically restructuring relationships between DK and DKL, and investing in high-growth areas within the logistics segment. This transformation is unfolding against a backdrop of evolving industry dynamics, including expected refining capacity rationalization, shifts in global supply and demand, and increasing regulatory focus on environmental factors. Geopolitical instability and the potential for widespread tariffs also introduce near-term economic uncertainty and commodity market volatility.

Central to Delek's operational strategy is a focus on continuous improvement and efficiency. While the company does not detail proprietary breakthrough refining technologies, its approach to technological differentiation lies in process optimization, digital system implementation, and targeted capital projects aimed at enhancing yield, increasing utilization, and reducing costs. Initiatives like the Enterprise Optimization Plan (EOP) leverage digital systems to improve real-time decision-making and automate processes, shifting operational roles to higher value-added activities. Specific projects, such as the alkylation unit upgrade at Tyler to increase high-value product output by approximately 500 barrels per day or the effort to connect existing lines at El Dorado's crude unit to draw approximately 3,000 barrels per day of jet fuel, demonstrate a tactical use of engineering and process technology to improve product mix and profitability with minimal capital outlay. These efforts contribute to the company's competitive positioning by aiming for lower operating costs and improved capture rates, helping to mitigate the impact of challenging market conditions.

Navigating the Competitive Currents

The U.S. downstream sector is characterized by intense competition from large-scale integrated players and regional refiners. Key publicly traded rivals include Valero Energy (VLO), Marathon Petroleum (MPC), Phillips 66 (PSX), and CVR Energy (CVI). While larger peers like Valero and Marathon benefit from significant scale and broader geographic reach, Delek positions itself by excelling in niche markets and leveraging its integrated logistics network to be a supplier of choice in its operating regions.

Quantitative comparisons highlight areas of strength and areas where Delek trails its larger competitors. Delek's logistics network provides a competitive advantage in regional distribution efficiency and can contribute to lower transportation costs compared to less integrated players like CVR Energy. Operational improvements under the EOP are targeting enhanced refining efficiency and lower operating costs per barrel, aiming to narrow the gap with more efficient large-scale operators like Valero and Marathon. However, Delek's smaller scale relative to these giants can mean lower overall throughput efficiency. Furthermore, Delek's historical profitability metrics, such as operating and net margins, have often lagged behind peers like Marathon and Phillips 66, who benefit from greater scale and, in some cases, diversification into less volatile segments like chemicals. Delek's debt levels have also historically been higher than some peers, impacting metrics like Return on Invested Capital (ROIC) and potentially limiting financial flexibility in challenging markets.

Delek's strategic response involves capitalizing on its regional strengths, optimizing its cost structure through initiatives like the EOP, and building out its logistics segment into a more independent, diversified entity. The expansion into water disposal and recycling, and natural gas processing within DKL, represents a move to diversify revenue streams beyond traditional refining logistics and compete in growing midstream markets, offering a more comprehensive service suite (crude, gas, water) that differentiates it from some pure-play logistics providers. Customer and supplier dynamics are managed through strategic contracts and optimization efforts, leveraging the integrated system to secure feedstock and deliver products efficiently, although volatility in commodity prices and RINs costs remains a significant external factor influencing profitability.

Performance and Strategic Momentum

The first quarter of 2025 reflected the challenging market environment, with Delek reporting a consolidated net loss of $158.5 million, or $172.7 million attributable to Delek shareholders. This compared unfavorably to a net loss of $25.2 million in the prior year period. The primary driver for the decline was a significant decrease in refining margins, with key Gulf Coast crack spreads falling between 26.5% and 37.1% compared to Q1 2024. Lower average prices for gasoline and ULSD also contributed to a decrease in net revenues, despite an increase in HSD prices.

Refining segment EBITDA plummeted to $16.2 million in Q1 2025 from $105.1 million in Q1 2024, directly reflecting the compressed margins and higher RINs pricing. Total refining throughput saw a slight decrease to 289,203 bpd from 296,652 bpd. Despite the challenging financials, operational progress was noted, including successful maintenance and turnaround activities at Tyler and Big Spring, positioning the refineries for improved reliability. Management highlighted progress on the EOP within the refining segment, particularly at El Dorado, which is showing improvements towards its $2 per barrel capture target.

The Logistics segment demonstrated resilience, with net revenues increasing slightly to $123.6 million from $112.5 million. However, segment EBITDA decreased to $85.5 million from $99.7 million. This decrease was primarily attributed to changes in accounting for certain throughput fees (now classified as interest income under sales-type leases) and lower wholesale margins, partially offset by the incremental contributions from the recently acquired H2O Midstream and Gravity Water operations. These acquisitions added $16.5 million and $22.9 million in revenue, respectively, in Q1 2025, showcasing the segment's growth trajectory.

Liquidity remains a focus. As of March 31, 2025, Delek had total liquidity of $1,810.7 million, comprising $623.8 million in cash and $1,186.9 million in unused credit commitments. Cash flow from operations in Q1 2025 was a use of $62.1 million, a significant decrease from the $160.9 million provided in the prior year, largely due to the net loss and unfavorable working capital movements, including increased cash paid for interest. Investing activities used $314.6 million, primarily driven by the $209.3 million cash component of the Gravity acquisition and a substantial increase in capital expenditures. Financing activities provided $265.2 million, reflecting net proceeds from revolving credit facilities and product financing arrangements. Total long-term indebtedness stood at approximately $3,035.3 million. Subsequent to the quarter, intercompany transactions with DKL are expected to increase consolidated financial availability by approximately $250 million.

Outlook and Value Creation Pathway

Management remains focused on executing its strategic priorities to improve profitability and unlock value. The Enterprise Optimization Plan (EOP) is a key driver, targeting at least $120 million in annual cash flow improvement by the second half of 2025. This plan, rooted in cost efficiencies (G&A, OpEx) and margin enhancements (commercial optimization, process improvements), is expected to structurally improve the company's financial health and free cash flow generation capacity, providing a buffer against market volatility.

For the second quarter of 2025, Delek provided specific guidance: implied system throughput is targeted between 302,000 and 318,000 barrels per day. Operating expenses are projected between $215 million and $225 million, General and Administrative expenses between $52 million and $57 million, Depreciation and Amortization between $95 million and $105 million, and Net Interest Expense between $80 million and $90 million. This guidance reflects expected higher throughput and ongoing cost management efforts.

The Logistics segment is anticipated to be a significant growth engine, with management reiterating its 2025 EBITDA guidance of $480 million to $520 million. This outlook is supported by the full integration and expected contributions from the H2O Midstream and Gravity acquisitions, as well as organic growth projects like the Lindy 2 natural gas processing plant expansion and acid gas injection capabilities in the Permian Basin. These initiatives are expected to increase DKL's third-party EBITDA contribution, supporting the goal of DKL independence and potentially reflecting more value in DK shares. The 2025 capital spending forecast includes approximately $75 million for completing the Lindy expansion and $160 million for other growth and maintenance projects, signaling continued investment in the logistics segment's expansion.

Delek's capital allocation strategy emphasizes a balanced approach. The company is committed to maintaining a strong quarterly dividend, recently declared at $0.26 per share. Share repurchases are viewed opportunistically, with $31.5 million executed in Q1 2025 and $512.1 million remaining under the current authorization, reflecting management's belief in the significant undervaluation of the stock. The potential granting of Small Refinery Exemptions (SREs) by the EPA, following a favorable court ruling, represents a potential upside, offering relief from significant past and future compliance costs, though the timing and extent remain uncertain.

Risks and Considerations

Despite the strategic progress and operational focus, several risks could impact Delek's outlook. Volatility in commodity prices and refining margins remains a primary concern, directly affecting profitability. Regulatory risks, particularly surrounding the cost and availability of RINs and evolving environmental regulations, can introduce significant uncertainty and costs. Geopolitical events and broader economic conditions can influence demand for refined products and contribute to market volatility.

Operational risks, including unplanned downtime or delays in capital projects, could impact throughput and costs. The company's debt levels, while managed, require consistent cash flow generation to service, and compliance with debt covenants is essential. While management is confident in the EOP and strategic initiatives, execution risks are inherent in any large-scale transformation. Competition from larger, more diversified players and the long-term trend towards electrification and renewable fuels pose ongoing challenges to the traditional refining business model.

Conclusion

Delek US Holdings is actively engaged in a strategic transformation designed to unlock value and enhance its long-term financial health. By divesting non-core assets, strategically optimizing its relationship with Delek Logistics, and investing in high-growth midstream opportunities, the company is reshaping its portfolio. The Enterprise Optimization Plan is a critical self-help initiative aimed at structurally improving profitability and free cash flow, providing a pathway to stronger performance independent of market cycles. While the refining segment faces ongoing market volatility, operational improvements and targeted projects are enhancing efficiency and capture potential. The Logistics segment represents a compelling growth story, driven by recent accretive acquisitions and organic expansion in the Permian Basin.

The investment thesis for Delek hinges on the successful execution of its "Sum of the Parts" strategy and the realization of benefits from the EOP. The company's balanced approach to capital allocation, including a committed dividend and opportunistic share buybacks, signals confidence in its future cash generation. Investors should closely monitor progress on the EOP targets, the continued growth and potential deconsolidation of DKL, market conditions, and regulatory developments, particularly regarding SREs, as these factors will be key determinants of value creation moving forward.