Delek Logistics Partners (DKL) Q2 2026 earnings call transcript

I will now hand the conference over to Robert Wright, EVP and Chief Financial Officer. Robert, please go ahead. Good morning and welcome to the Deliclogistics Partners second quarter earnings conference call. Participants joining me on today's call will include Abigail Sorek, President and Chairman, Mark Hobbs, EVP as well as other members of our management team. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including statements regarding guidance and future business outlook. Any forward-looking statements made during today's calls involve risks and uncertainties that may cause actual results to differ materially from today's comments. Factors that could cause actual results to differ are included in our SEC filings. The company assumes no obligation to update any forward-looking statements.

I will now turn the call over to Abigail for opening remarks. Abigail.

Thank you, Robert. Today, DCL reported $144 million in adjusted DPTA in the second quarter. Reaffirming fully-rebidized guidance of $520 to $560 million.

DCL's strong results are a reminder of our advanced position as a premier full-service provider of good gas and water in the payment basin. As of July 1st, Mark moved from his CFO position at Delic to lead role at Deliclogistics and we recently brought on Chris Kendrick as our new SVP of Commercial. I'm highly confident that Mark, Chris, and the rest of the Deliclogistics team will deliver the next chapter of goals for DCL. All three of our segments are doing well, and I will provide more detail on each one of these segments. Starting with guests, we are nearing the completion of our integrated sour gas processing, treating, and inhaling solution of free-be gas complex. The comprehensive system will serve our customer by further supporting long-term oil and gas production goals in the Delo basin.

Moving to code, both DPG and DGG continue to see strong performance with DGG code gathering delivering a record quarter. We look forward to further optimize and growing the system. Our water business continues to perform well, and we are continuing to explore goals opportunities in this space. Our combined gas, code, and water offering in the payment basin has improved our competitive position and establish a platform for future goals. We will continue to pursue goals opportunities in a disciplined manner while maintaining a focus on leverage and coverage. We will also intend to remain a good steward of our stakeholders' capital. Our board of directors has approved our 54 consecutive quarterly distribution increase, raising the distribution to $1.13 and a half per unit.

This is an extraordinary milestone, and it reflects the exceptional work of our team and the financial discipline that has brought us to this point. With the foundation we have built and the opportunities ahead, we are confident in our ability to continue delivering sustainable goals and long-term value for our unit holders. I will now turn it over to Mark who will provide additional detail on our operations.

Thank you, Avigal. I'm excited about the opportunity to join Delic Logistics and to work with the exceptional team that we have at DKL. I see tremendous growth potential for Delic Logistics as we are uniquely positioned to meet our customers' increasing needs for midstream services across crude gas and water in the Permium basin. We continue to see heightened activity by producers in securing undeveloped acreage and future drilling locations in the northern Delaware and Lee and Eddy counties. Higher crude prices as a result of the ongoing conflict in the Middle East combined with strengthening Waja prices as additional takeaway capacity comes online by early next year should drive increased demand for our three-stream service platform strategically centered in Lee County.

As Avigal mentioned, our competitive position as a three-stream provider sets us up well for future growth. Our strong and growing third-party business continues to increase our economic separation from our sponsor DK. In 2026 on a former basis, we continue to expect approximately 80 percent of our run rate EBITDA will come from third parties.

Turning to our business, we operated well in the second quarter, delivering safe and reliable performance for our customers. We continue to see an increasing need for incremental salary gas gathering and processing capabilities in New Mexico to support our customers' growth plans. During the second quarter, we made great progress advancing our industry-leading salary gas solution in the Delaware basin. With the increased capacity to our living processing complex and the completion of our first AGI well, we are focusing our efforts on building out our salary gas gathering infrastructure including compressor stations. We are aligned with our customers and our salary solution will unlock future growth for producers in the region and demand for our services. We achieved higher volumes in the second quarter in our gas business versus the first quarter and are expecting to see a step change in our utilization as our salary gas solution comes online later this year.

We continue to evaluate options for future investments that will support further expansions of the living complex based on anticipated customer needs for additional salary gas processing in the region.

Moving to crude, our Delaware accrued gallery business achieved record volumes in the second quarter. Our accrued gathering business in both the Delaware and the water offering continues to yield great results. In our water business, we are seeing strong operating performance driven by the successful integration of the H2O and gravity acquisitions in late 2024 and early last year respectively. Produced water handling and disposal continues to be a critical and increasing need of our customers. Our scale and capabilities across the Delaware and Midland basins present us with unique opportunities to drive future growth in our water business. And I look forward to updating the market as we advance these solutions.

With that, I will pass it on to Robert.

Thank you, Mark. As Apigal and Mark highlighted, we are pleased to report another exceptionally strong quarter for the partnership, with adjusted EBITDA reaching a quarterly record of approximately $144 million.

Importantly, we are delivering this growth while staying focused in discipline on our long-term leverage and coverage targets. We ended the quarter with a leverage ratio of 4.23 times, up modestly from the first quarter. This uptick reflects capital investments we are making that are expected to generate up to $75 million of run rate EBITDA, a highly attractive return on our 180 to $190 million growth capital program for the year. We exited the quarter with a strong balance sheet. During the quarter, we proactively refinanced our high yield capital structure to lower our cost of debt, issuing a new $800 million senior note due 2034, fully retiring our 2028 notes and partially redeeming our 2029 notes. Together, these transactions reduce annual interest costs and extend our maturity profile.

Liquidity remains robust at approximately $1.1 billion. Turning to our results, adjusted EBITDA for the quarter was approximately $144 million compared to $127 million in the same period last year. Distributable cash flow, as adjusted, came in at approximately $81 million and our DCF coverage ratio held steady at approximately 1.33 times. We are also proud to announce our 54th consecutive distribution increase, which brings the quarterly distribution to $1.13.5 per unit. As to our segment results, starting with gathering and processing, adjusted EBITDA for the second quarter was $104 million up from $78 million in the second quarter of 2025. The improvement was driven primarily by higher utilization at the Libby gas complex, along with stronger realized margins in our premium base and crude business.

In wholesale marketing and terminaling, adjusted EBITDA was approximately $13 million versus $23 million a year ago, with the decline largely attributable to the effects of the 2024 amended extend agreement with Delic. Storage and transportation delivered adjusted EBITDA of $16 million compared with $17 million in the prior period. The modest decrease primarily reflects the January 2026 related party transactions. And finally, our investments in pipeline joint venture segment contributed $21 million this quarter up from $17 million in the second quarter of 2025, led by continued strong results from the Wink2Webster joint venture. Moving now to capital expenditures, total capital spending for the second quarter was approximately $61 million, of which $51 million was for growth capital. That spend was primarily directed toward the drilling of our first ADI well and continued build out of newer sour gas gathering infrastructure.

The balance funded other growth initiatives, including work to advance reliable power solutions for the Libby gas complex. Looking ahead to the remainder of 2026, as Avogol noted, our confidence in the earnings trajectory of the partnership remain intact. And we are reaffirming our full year 2026 adjusted EBITDA guidance range of $520 to $560 million.

With that, we will now open the call for questions.

Yeah, so we are very confident about the results we see on the second quarter. Obviously, we are starting the year very well. We are very confident about the guidance we are seeing. Yes, I said on my prepared remarks, both the DPG and DDG performed very well. I think the DDG had a record number around it. We're very happy about the process that we are seeing on the gas plant that increases the quarter of a quarter of a quarter. As we said on the prepared remarks, we are very close to completing the gas trading solution. On the south side, it will take us to a step change and let mark it to complete.

Yeah, thanks, Abigail. Yeah, Doug, I'll just touch on the business performance. Across the board, we're performing well in the second quarter and continuing to do so. We have great infrastructure, which, as you know, is strategically positioned in the right location. We continue to see a lot of activity amongst our customers in the northern Delaware with close proximity to our assets. As Abigail mentioned, our Delaware crew business had a record volume in Q2 at over 157,000 barrels per day from around 129 in Q1. Our produced water volumes in both the Midland and Delaware are increased as well to over 687,000 barrels a day up from 557 in Q1. As Abigail mentioned, our gas volumes continued to ramp.

We were over 80 million two feet a day in Q2 up from around 64 in Q1, and we continue to see that trend continue in Q3. Both Libby 1 and Libby 2 plants are running well. The volumes are increasing, and as we said in our and we do expect to see a step change in our gas volumes through the rest of the year.

You are very, you're correct. The math that you are doing is absolutely right, and I'll give you some more context around that. We are very happy about the results. We're very happy about the business. We have each one of them, the strategy that we put together, working extremely well, and we are very happy about the management team that we have over there. We're going to follow in the same sequence that we had in the last year, that Q4 call, we are submitting the guidance, and if we see a way to upgrade the guidance, we did it last year in Q3, so stay tight, and the moon needs to come.

So you touch a very good point. Obviously, we are in close touch with our customer on a daily, weekly basis, and they are very excited about their business, which make us very excited about our business. I've seen your note earlier about the rigs and the area and the way that we have in our acreage, and that's very good to see how detailed it becomes, the discussion. So we are very optimistic about where we are. We have a prime location. We have very good producer in our acreage. You see the statistics about the permanent basis, as general, going from the beginning of the event to now, by around 20 rigs, we see an increase forecast in our acreage as well.

So we are very optimistic about where we are, and who do we do business with? So stay tuned and more to come. Muhiti, you want to talk about the Waja?

Yeah, I think I've got to cover it very well, and Gabe, you and I have discussed this previously as well. So there are two positive effects happening at the same time. First is, there is some strength in the commodity prices, and based on that, we have seen incremental production, and because of that, we've seen forecasts for not only second half of 2026, but 2027 rice. And second is this development around Waja, Waja prices have strengthened. This is a minor positive for us just from a result standpoint, but it's a much bigger positive from a volume standpoint, and we should see that reflected. Beyond that, we have talked about in the past that we are working on $185 million of growth cap X, which will yield $75 million in beta 15 and 26 and 16, 2027.

So our setup on both our basis is very, very strong. So we are very excited about the things that we are seeing.

And then maybe I could just follow up, remind me on your contracting behind your water assets, to what degree things are volumetric versus take or pay, and is there any change or shift in kind of your contracting strategy going forward?

Yeah, Gabe, I can answer that. So we don't really share our contractive strategy, but we're very excited about our produced water gathering business as Mark has, Mark alluded in his preparer marks and also has an answer to the previous question. We have scale in the business. We are seeing three stream service, gas, water, and crude, really reaping results.

And even in the middle end, we just have two streams, crude and water. We are seeing incremental positive results. So we are very excited about the water business that we have. We are building upon it, and we will share more details around this when we are ready.

Yeah, obviously the king here is the rock, and we think the rock going a bit sour. And the second part of that is our ability is our drilling of AGI well and building a sour complex. So the combinations that make us very uniquely positioned, that we have three things coming together, our location, the rock, the gas that we see coming out of the ground, and our infrastructure all coming together very nicely that give us competitive advantage, and we are very excited about that. And I will let them mark that is very close to it, and share some of his thoughts.

Yeah, thanks, Abigail. Look, as we mentioned in the past, we are seeing increasingly more sour gas production from our customers, moving from sweet to sour. And as you rightly said, we're seeing that trend continue, and we've added a lot of capacity and preparation to handle that. As you know, adding Libby 2, completing the AGI well, as Abigail mentioned, and we're now a near completion of our sour gas gathering and adding compression. And it's going to provide us with the much needed sort of unique sour gas solution in the Northern Delaware, which will support our customers' future production growth plans. And not only will we see a step change in our gas volumes because of this capability, but it positions us extremely well for future growth in the region.

Yeah, so obviously, we're very disciplined around our capital and deployment. As you can see, we're very disciplined around what we did with M&A, right? We did both water, bolt on a position around 5 to 6 times where they traded now around probably 9 to 10. So we are not going to do something which is not a creative to leverage your coverage, your shock free cash flow and not supported by a strategy. So the combinator answer is the combination of extremely disciplined on one side, but on the other side, extremely aggressive of getting the company towards the right direction and the very disciplined around capital location. And we'll let the robot to chime in. Yeah, thanks, Africa.

Yeah, I have a great question. We continue to remain comfortable in our long-term leverage target of 3.5 times. We're seeing significant growth opportunities and similar to what we've said in the past. Because of that, we will manage our leverage ratio around that four times as we grow. As we said on the prepared remarks, our leverage ratio right now does sit around the 4.23 times. And that's largely due to a lot of the spending of around 180 to $190 million, so very low multiple there. And considering this, we expect to manage our leverage ratio down as we start to realize this even in our results.

It's probably also just important to note that despite all this recent growth spending, we've maintained a strong balance sheet. We have over a billion dollars of availability, which will facilitate our continued growth trajectory into the future.

And I guess similarly, how should we expect Libby 2 to ramp in the back half? Yeah, absolutely. I would start and let the market chime in. So, obviously, the connections that we are seeing on the ground are going very well, both on the compressor side and on the plant itself. We have a very good close relationship with our producers and we are committed to give the best service we can on time, on budget, and making sure it all ties together with the right offering between sweet and sour. We have seen increases we mentioned earlier between Q1 to Q2 and between Q2 to Q3 and we've seen more progression around that once we are completing our sour gas offering.

But why are you charming, Mark? Sure. I think Abigail said it well, Gabe, but we're seeing this shift from sweet to sour. So, we've seen our gas ramp up as we've built out our capabilities. We're optimizing our system around compression and look forward to, like I said, a step change in our volumes as we move through some of that completion here in the third quarter as we move into the fourth quarter. So, I think we're on a great trajectory to really increase the utilization of our plants as we move through here.

Yeah. So, obviously, we have all the time our eyes open around inorganic opportunities. As I said in the past, in order for something to get to the finish line, it's to be attractive to leverage ratio, coverage ratio, and the free cash flow so that we are extremely disciplined around that. When we saw those opportunities coming our way, we didn't hesitate. We act on that very quickly and aggressively as needed. But in organic, it's not the objective objective. It's to grow the company in a measured, disciplined, smart way. On the other side, we can be very happy if you're putting on the intrinsic value that we see on our asset. We bought something around five to six times.

Probably now it's around 10 times. And we have seen lately the gas deal that was in the market was low to mid the teens, which if you're doing the intrinsic value of each one of our assets, it stands now. And with including the development that we are now doing, you will get to a very high unit price. So there is a tremendous amount of value that we created versus where the market is now. And our commitment to the market is still to create additional value. We grew that company 15% year over here in the last few years. And we increased distribution for quarters in a row. All of that probably the best combination between growth and yield to our investors.

So we are very proud of what we do and we'll keep doing it.

Thank you. So I would like to thank my colleagues around the table for the hard work and dedication. I would like to thank to our board for their trust and support. I would like to thank you, the investor of a thing that a nice huge transformation in the DCL. And most importantly, I would like to thank the entire employees of making these companies good as we possibly can every day. Thank you. This concludes today's call. Thank you for attending. You may now disconnect.