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Magellan's shelving Permian pipeline plans positive for Delek shareholders

Following a key partner's bowing out, the increased likelihood of the Permian to Gulf Coast oil pipeline project's being shelved is positive news for shareholders of Delek US Holdings Inc., analysts say, despite the company's effort to diversify its revenue stream away from the volatile refining business.

Amid growing concerns about a looming midstream infrastructure overbuild in the region, Magellan Midstream Partners LP said in a March 25 SEC filing that "it is unlikely that the … project as initially announced will proceed."

"We estimate [Delek's] 25% interest in PGC would have been at least $500 [million], a sizeable stake for a company with average capex of $250 [million] the past two years," Tudor, Pickering, Holt & Co. analysts wrote in a March 26 note. "This could have limited share buybacks during construction. And … it's not clear that [Delek] would have received full valuation credit for the additional midstream EBITDA."

In a March 26 note, Mizuho analyst Paul Sankey noted the potential for wider Midland crude oil discounts "directly benefits" Delek.

According to the U.S. Energy Information Administration, Delek's four refineries have a total atmospheric crude distillation capacity of 311,000 barrels per calendar day.

According to Delek, its refining system's crude slate is heavily weighted toward Permian basin crude oil, with its 73,000 bbl/d Big Spring refinery running 100% Permian Basin crude oil priced at Midland.

During the company's Feb. 20 earnings call, Delek executives said refining segment contribution margin climbed to $235.3 million from $185.8 million seen during the same quarter a year ago because of wider crude oil discounts.

During remarks the same day, Delek executive vice president, CFO and principal accounting officer Kevin Kremke, who was succeeded by Assi Ginzburg March 5, said at a long-term average Midland crude oil discount to West Texas Intermediate of $2.50 per barrel, Delek's current operations have the ability to produce approximately $750 million of annual EBITDA.