Executive Summary / Key Takeaways

• Delek Logistics Partners (NYSE: DKL) is undergoing a significant transformation, pivoting from a sponsor-dependent entity to a premier, full-service midstream provider focused on the prolific Permian Basin, aiming for increased economic separation from Delek US Holdings (DK).
• Recent strategic acquisitions (H2O Midstream, Gravity) and transactions with DK (Wink to Webster dropdown, DPG Dropdown, contract amendments) are enhancing DKL's competitive position, diversifying its customer base, and are expected to increase third-party cash flow contribution to approximately 80% on a pro forma basis.
• Key organic growth initiatives, notably the Libby II gas processing plant expansion and the addition of Acid Gas Injection (AGI) and sour gas handling capabilities in the Delaware Basin, provide a significant technological and operational edge and are expected to drive future EBITDA growth.
• The Partnership reported a record first quarter 2025 Adjusted EBITDA of $117 million and reaffirmed its full-year 2025 Adjusted EBITDA guidance of $480 million to $520 million, supported by strong Permian fundamentals and the benefits of recent strategic actions.
• DKL continues its track record of returning capital to unitholders, declaring its 49th consecutive quarterly distribution increase to $1.11 per unit for Q1 2025, with expectations for the distribution coverage ratio to rise above the long-term objective of 1.3x in the second half of 2025.

The Permian Pivot: Building an Independent Midstream Future

Delek Logistics Partners, LP was established in 2012, initially serving primarily as the logistics arm for its parent company, Delek US Holdings. Its early asset base, including pipelines, storage, and marketing infrastructure, was largely dedicated to supporting DK's refining operations in Texas and Arkansas through long-term, fee-based contracts. While providing stable cash flows, this structure meant DKL's performance and strategic flexibility were closely tied to its sponsor. Recognizing the immense potential of the Permian Basin and seeking to unlock greater value and independence, DKL embarked on a strategic transformation in recent years, aiming to evolve into a diversified, third-party focused midstream energy partnership.

This strategic pivot centers on expanding DKL's footprint and service offerings in the Permian, particularly in the Midland and Delaware sub-basins, through a combination of targeted acquisitions and organic growth projects. The objective is not only to capture growth in one of North America's most active energy plays but also to significantly increase the contribution of third-party cash flows, thereby enhancing DKL's economic separation from DK. This journey towards independence is a core tenet of the Partnership's strategy, designed to create value for both DKL unitholders and DK shareholders.

The competitive landscape in the midstream sector is characterized by large, integrated players like Kinder Morgan (KMI), Enterprise Products Partners (EPD), and Plains All American Pipeline (PAA), who possess vast networks and economies of scale. While DKL's scale is smaller, with an estimated 2-5% market share in relevant pipeline and storage segments compared to KMI's 15-20% or EPD's 20-25%, its strategy focuses on developing niche strengths and leveraging its existing infrastructure and relationships. DKL's competitive positioning relies on its integrated support for Delek's refineries and, increasingly, its ability to offer comprehensive services within specific, high-growth Permian sub-basins.

Strategic Acquisitions and Deconsolidation Milestones

The transformation gained significant momentum through a series of strategic transactions in late 2024 and early 2025. In August 2024, DKL acquired DK's interest in the Wink to Webster (W2W) joint venture, gaining an indirect 15.6% stake in a premier crude oil pipeline system connecting the Permian to the Houston area. This acquisition enhanced DKL's Permian position and asset quality, contributing $5.4 million in income from equity method investments in Q1 2025.

Building on this, DKL made two pivotal acquisitions in the water disposal and recycling sector. The acquisition of H2O Midstream in September 2024 and Gravity in January 2025 added integrated water systems and gathering assets in the Midland Basin and the Bakken. These deals, totaling over $500 million in consideration (cash and units), were immediately accretive and highly synergistic. They position DKL as a full-service provider capable of handling crude, gas, and water, particularly in the Midland Basin, where the integration of these systems is enhancing a combined crude and water offering in key counties like Howard, Martin, and Glasscock. Management highlighted that these water acquisitions are exceeding expectations and presenting cross-sell opportunities.

Further advancing the economic separation from DK, subsequent to the first quarter, DKL and DK executed a series of intercompany transactions on May 1, 2025. This included the transfer of DK's Permian Gathering purchasing and blending business to DKL (the DPG Dropdown), the termination of the East Texas Marketing Agreement, and the sale of the El Dorado rail facility assets back to DK. As part of the DPG Dropdown consideration, DKL cancelled $58.8 million in receivables owed by DK. These transactions, along with the acquisitions, are projected to increase DKL's third-party EBITDA contribution from approximately 70% to around 80% on a pro forma basis, significantly reducing reliance on the sponsor and aligning DKL as a largely independent, third-party cash flow company.

Technological Edge and Permian Growth Engines

A critical component of DKL's growth strategy lies in its operational expansions and technological capabilities, particularly within the Gathering and Processing segment in the Permian. In the Delaware Basin, DKL is significantly expanding its natural gas processing capacity by constructing the Libby II plant. This expansion is adding 100 million to 120 million cubic feet per day (MMcf/d) of incremental capacity and is currently in the commissioning phase, with full operational capacity anticipated in the latter half of 2025. The plant is described as "highly subscribed," indicating strong demand for its services.

Beyond standard gas processing, DKL is adding Acid Gas Injection (AGI) and sour gas handling capabilities at the Libby complex. This is a key technological differentiator in the Delaware Basin. Management emphasized that the lead time for developing sour gas capabilities in New Mexico is very long, providing DKL with a significant competitive advantage that most plants in the area currently lack and are unlikely to acquire quickly. This unique offering allows DKL to handle a broader range of natural gas streams, enhancing its competitive position and providing a "good runway of growth." The combined offering of crude, gas, and water services in the Delaware Basin, facilitated by these operational and technological advancements, provides a definitive competitive advantage and opens up additional opportunities for crude and water gathering.

These organic growth projects, coupled with the strategic acquisitions, are the primary drivers behind DKL's expected cash flow growth and improvement in distribution coverage. The dedicated acreage agreements in the Permian also provide built-in growth opportunities in favorable market conditions without requiring incremental customer acquisition costs.

Financial Performance and Outlook

Delek Logistics reported a strong start to 2025, achieving a record quarterly Adjusted EBITDA of $117 million in the first quarter. This performance keeps DKL on track to meet its full-year 2025 Adjusted EBITDA guidance of $480 million to $520 million, representing approximately 20% year-over-year growth based on the preliminary 2025 expectations announced in February.

While consolidated net revenues saw a slight decrease of 0.9% in Q1 2025 compared to Q1 2024, primarily due to the reclassification of certain throughput and storage fees as interest income under sales-type lease accounting ($22.5 million in Q1 2025 interest income) and the assignment of a marketing agreement, the underlying operational performance in key growth areas was robust. The Gathering and Processing segment, the focus of recent investments, saw its EBITDA increase by 17.6% to $67.9 million, driven by the contributions from the H2O and Gravity acquisitions and increased Midland Gathering volumes. Conversely, the Wholesale Marketing and Terminalling and Storage and Transportation segments experienced EBITDA declines, largely attributable to the impact of sales-type lease accounting reclassifications and, for WMT, lower wholesale margins influenced by seasonal weather impacts.

The Partnership's liquidity position remains solid, totaling $447.0 million as of March 31, 2025, comprising $444.9 million in unused credit commitments and $2.1 million in cash. Total indebtedness stood at $2,155.1 million, an increase from year-end 2024 due to borrowings under the revolving credit facility to fund acquisitions and growth projects. DKL reported compliance with all debt covenants.

Capital spending in Q1 2025 was $71.9 million, heavily weighted towards growth projects ($71.3 million in G&P), with a full-year 2025 forecast of $235.3 million for total capital spending.

DKL continues its commitment to returning capital to unitholders, declaring its 49th consecutive quarterly distribution increase to $1.11 per unit for Q1 2025, a 3.7% increase over Q1 2024. The distributable cash flow coverage ratio was 1.27x in Q1 2025, and management expects this ratio to steadily rise above the long-term objective of 1.3x in the second half of 2025 as the benefits from the Libby II ramp-up and acquisition synergies are fully realized. The Partnership also has an active unit repurchase program, with $140 million remaining under the authorization to repurchase units from DK through December 31, 2026.

Risks and Competitive Dynamics

While DKL's strategic direction is clear and promising, investors should be mindful of potential risks. The near-term economic outlook faces uncertainty from widespread tariffs, geopolitical instability, and commodity market volatility, which could impact drilling activity and demand for services, although DKL's fee-based contracts with minimum volume commitments and dedicated acreage provide some recessionary protection. Dependency on Delek Holdings, while decreasing, remains a factor, and changes in DK's financial health or strategic priorities could still affect DKL. The Partnership is also subject to extensive environmental and safety regulations, and potential releases or non-compliance could result in substantial costs. Inflationary pressures could impact operating expenses and capital project costs.

In the competitive arena, DKL faces larger, more financially robust competitors like KMI, EPD, and PAA. Comparing TTM financial ratios, DKL's gross profit margin (23.78%) and operating profit margin (19.81%) are generally lower than KMI (56% gross, 29% operating) and EPD (13% gross, 13% operating), but potentially comparable or better than PAA (3% gross, 2% operating), reflecting differences in business mix and scale. DKL's EBITDA margin (42.40%) is strong, indicating efficient operations relative to its cost structure. Its Debt/Equity ratio (0.12) appears significantly lower than peers (KMI 1.04, EPD 1.12, PAA 0.44), suggesting a more conservative balance sheet post recent equity transactions, although total debt is substantial. DKL's P/E (15.38) and P/S (2.43) ratios fall within the range of peer valuations, while its dividend yield (10.30%) is competitive.

DKL's competitive advantages lie in its integrated relationship with DK (providing stable base volumes and strategic alignment), its growing full-service offering (crude, gas, water) in specific Permian sub-basins, and its differentiated technological capabilities like sour gas handling. These factors help it compete effectively in its target areas despite lacking the national scale of larger rivals. However, its smaller size can lead to higher operating costs per unit compared to larger players, and its historical dependence on DK remains a vulnerability, albeit one that is being actively addressed.

Conclusion

Delek Logistics Partners is in the midst of a transformative period, strategically repositioning itself as a key midstream player in the Permian Basin with a clear path towards greater independence from its sponsor. The recent wave of acquisitions and intercompany transactions are fundamentally reshaping DKL's asset base, diversifying its customer mix, and significantly increasing its third-party cash flow contribution. Coupled with organic growth engines like the Libby II gas plant expansion and its differentiated sour gas handling technology, DKL is building a more robust and competitive operational profile.

The record first quarter results and reaffirmed full-year EBITDA guidance underscore the positive impact of these initiatives. While challenges such as market volatility and integration risks persist, DKL's built-in contract protections, focus on high-growth Permian areas, and commitment to prudent financial management provide a foundation for navigating these headwinds. For investors, the story of DKL is one of strategic evolution, operational expansion in a premier basin, and a commitment to distribution growth, underpinned by a deliberate move towards becoming a more independent and diversified midstream entity. The successful execution of its strategic plan and the continued realization of synergies from recent acquisitions will be key factors to watch as DKL aims to deliver on its growth objectives and enhance unitholder value.