Delek Group Ltd (DLKGF) (Q2 2026) Earnings Call Highlights: Record Logistics Performance and ...

Negative Points

• RVO costs remain elevated, and the absence of SREs creates a significant burden on small refineries like Delek.

• Market volatility from Middle East events and steep backwardation in Q2 may not persist, potentially impacting future refining margins.

• Working capital outflow of $138 million in Q2, reflecting the impact of market conditions on cash flow.

• Interest expense guidance for Q3 is expected to be $75-$85 million, with DKL contributing a significant portion, indicating higher financing costs.

• Asphalt business saw a $3 million reduction in contribution, and its performance remains subject to crude price volatility.

• The company does not hedge refining margins, exposing it to crack spread fluctuations, which could affect earnings stability.

• Potential tax impact on SRE proceeds is uncertain, though the company plans to minimize it.

• DKL's growth projects require continued capital investment, with $61 million in Q2, which may limit near-term free cash flow.

• The company's free cash flow yield, while strong, is dependent on mid-cycle conditions, which may not be sustained in a downturn.

• The SRE process remains uncertain, with no guarantee of full waivers for 2025, and the timing of any awards is unclear.

Q & A Highlights

Q: Can you offer any update on the current timing of 2025 SREs? And specifically, can you clarify if SREs are awarded, what are the restrictions on value? Can you sell 2025 credits at 2026 prices? And related, you recently were awarded Krotz Springs having previously been denied. Can you share the process that led to the change in decision and implications for what it might mean across the portfolio for 2026 going forward? A: Avigal Soreq (President and CEO) and Mohit Bhardwaj (EVP, New Energy, Strategy and Investor Relations) stated that the SRE issue is about "disproportionate economic harm" and impacts roughly 40 refineries across the nation. The administration, Senate, Congress, and EPA all understand the need for a timely resolution to support high-paying jobs and local communities. Regarding the Krotz Springs award, the petition was strong, and both the EPA and DOE agreed that the company faces disproportionate economic harm because of the RFS, leading to the overturned decision. They are excited about the strength of their 2025 petitions and look forward to the announcement.

Q: Could you just talk a little bit more about your capital allocation strategy? You've got a good amount of tailwinds coming in from a cash perspective. So how should we think about that, whether that be buybacks, a dividend or any other M&A consideration or any other allocation considerations? A: Avigal Soreq (President and CEO) reaffirmed a clear capital allocation strategy: maintaining the dividend through the cycle and taking a balanced approach between strengthening the balance sheet and buybacks. He highlighted that the company has bought back around 10% of its shares since the beginning of 2025, making it a leader among peers in returning capital to investors. He emphasized that being shareholder-friendly is a cornerstone of their strategy and will continue going forward.

Q: Can you talk a little bit more about EOP? Any places that it's surprising to the upside? And as you kind of think about -- you always talk about it being ongoing in the next leg, like where are areas for further improvement? A: Avigal Soreq (President and CEO) described EOP as a "lifestyle" rather than a project, with the entire organization committed to generating free cash flow in all market conditions. The program started at around $100 million and has more than doubled. Mohit Bhardwaj (EVP, New Energy, Strategy and Investor Relations) added that confidence in the mid-cycle free cash flow profile is increasing, citing the slide deck's projection of $650 million to $700 million in free cash flow, including DKL distributions, which represents a 15% to 20% free cash flow yield at current prices. They hinted at more exciting developments in the next phase of EOP.

Q: You have a very strong sour gas presence. Can you give us an update on in terms of completion of the Libby gas complex, when do you expect to get completed? And then should we expect a ramp into the fourth quarter and year-end? And how that further increases your position in the Permian sour gas opportunity? A: Avigal Soreq (President and CEO) noted that DKL is on a pro forma basis 80% third-party and close to completing its comprehensive gathering, treatment, processing, and acid gas injection solution. Mark Hobbs (EVP, Logistics of the General Partner) added that both Libbey 1 and Libbey 2 plants are running well, and they are seeing increasingly more sour gas production from customers. The completion of the sour gas gathering and compression offering provides a unique solution in the Northern Delaware, which will help customers continue to grow production. They expect this to drive a step change in gas volumes through the rest of the year.

Q: Given the amount of global capacity that's down, do you expect the product markets to remain tight? And if you could provide some commentary on how, given your high diesel yield, it really benefits you guys? A: Avigal Soreq (President and CEO) stated that with roughly 5 million barrels of capacity offline, it will take a few quarters for everything to normalize, implying a structural shortage of product will last a bit longer. He highlighted the company's high distillate and jet fuel yield, good access to crude from both the Gulf Coast and Mid-Continent, and the ability to respond quickly to market changes as key advantages. Mohit Bhardwaj (EVP, New Energy, Strategy and Investor Relations) added that producers have started completing wells, increasing production in both the Midland and Delaware Basins, which benefits both the midstream and refining businesses. He also mentioned that new product pipelines being discussed will have a positive impact on clearing markets.

Q: I wanted to go back to the SREs and specifically on crops and the recent award, how should we think about monetizing that award and the magnitude of cash you'll think you could get from that? And where is the priority in terms of where that cash goes? A: Avigal Soreq (President and CEO) reiterated the strict capital allocation guidance of maintaining the dividend and a balanced approach between the balance sheet and buybacks. He emphasized that the company does not plan to hold excess cash on its balance sheet. Mohit Bhardwaj (EVP, New Energy, Strategy and Investor Relations) clarified that for companies that stay in compliance, SREs are a return of RINs already purchased, not a gift. He noted the company has a very good strategy for managing RIN purchases and disposals and is not concerned about the process.

Q: Obviously, 2Q, you had a pretty steep backwardation. It seems like the curve has eased here in 3Q. Should we expect that to be kind of a one-to-one benefit in terms of kind of the backwardation in 2Q going to easing in 3Q flowing to your refining margin? A: Avigal Soreq (President and CEO) confirmed that the easing of backwardation will have a one-to-one impact on refining margins. He noted that the curve is now pretty flat, with around $1.50 on the front, compared to the $6 to $7 or more seen in Q2, and this is reflected in the crack spread.

Q: Could you just talk through how you're thinking about the current deconsolidation and value unlock options here? You've done a good job with bolt-ons and organic growth in the past at DKL and the currency at DKL has certainly strengthened this year. So curious about the M&A landscape as well. <

For the complete transcript of the earnings call, please refer to the full earnings call transcript .