BofA Securities has initiated coverage on Delek Logistics Partners, LP (NYSE: NYSE:DKL), assigning an underperform rating to the stock along with a price target of $36.00.
The firm's analysis suggests that Delek Logistics, which is majorly owned by Delek US Holdings (NYSE:DK), Inc., does not present hidden value within its structure, despite a portion of its assets being integral to Delek US Holdings' refining and logistics operations.
The coverage, which was taken over by BofA Securities, highlighted that Delek US Holdings owns 78.7% of the common and general partner units of Delek Logistics.
The parent company, Delek US Holdings, operates four refineries, with two being average and the other two ranking in the lower quintile in terms of margin, which indicates a higher sensitivity to refining crack spreads compared to its industry peers.
The analyst from BofA Securities pointed out that 50% of the midstream assets that support Delek US Holdings' refining and logistics operations should be valued at a refining multiple. This assessment is based on the strategic role these assets play in the company's overall operations.
In other recent news, Delek Logistics Partners reported record second-quarter earnings with an adjusted EBITDA of $102.4 million. The firm announced several strategic transactions, including an extended contract with DK, an investment in a new gas processing plant, and the acquisition of H2O Midstream. These developments are aimed at strengthening Delek Logistics' market position in the Permian Basin.
Citi has upgraded its rating on Delek Logistics from Neutral to Buy, citing an improved outlook and high yield potential. The firm also raised the price target to $45 from the previous $44. The Board of Directors approved an increase in the quarterly distribution to $1.09 per unit, reflecting Delek Logistics' strong performance.
The company's leverage improved, with a ratio of 3.81 times at the end of the quarter, down from 4.84 at the end of 2022. Looking ahead, the majority of Delek Logistics' EBITDA is projected to come from non-related parties by the first half of 2025, making it a mostly independent midstream company. The new gas processing plant is highly subscribed and is expected to generate cash on cash returns of more than 20%, with completion targeted for the first half of 2025.
InvestingPro Insights
Adding to BofA Securities' analysis, recent data from InvestingPro provides additional context for investors considering Delek Logistics Partners, LP (NYSE:DKL). Despite the underperform rating, DKL boasts a robust dividend yield of 11.12% as of the latest data, which may appeal to income-focused investors. This aligns with an InvestingPro Tip highlighting that DKL "pays a significant dividend to shareholders" and has "raised its dividend for 11 consecutive years."
The company's P/E ratio stands at 13.45, suggesting a relatively modest valuation compared to some peers in the energy sector. This could be interpreted in light of BofA's assessment that there's no hidden value in the company's structure. Additionally, DKL's revenue for the last twelve months as of Q2 2024 was reported at $1046.68M USD, with an operating income margin of 25.0%, indicating a solid operational efficiency.
It's worth noting that InvestingPro lists 10 additional tips for DKL, offering a more comprehensive view of the company's financial health and market position. Investors seeking a deeper analysis may find value in exploring these additional insights on the InvestingPro platform.
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