Wednesday, December 4, 2013

Should You Add This Small Refiner, Backed By Israel's Energy Giant, To Your Portfolio?

Delek US Holdings (NYSE:DK) is a small integrated downstream energy firm with a market cap of $1.86 billion and is backed by Israel’s Itshak Sharon (Tshuva). The company is eying long term organic growth of its refining business and it will substantially increases its margins in the coming years. The company has generated healthy ROA and ROE while its stock is trading at attractive multiples of trailing earnings, sales and book value. 

Delek US Holdings (DK), or Delek, is an integrated downstream energy firm which operates in three segments; petroleum refining, logistics and convenience store retailing. The company, with a market cap of $1.54 billion, gets most of its consolidated revenues, nearly 70%, from its refining business while the rest comes from its retail and logistics operations. Since Delek's future depends mainly on the performance of its refining business therefore this segment will be the focus of this article.

In its most recent conference call, Delek's CFO Assi Ginzburg pointed out that the market conditions during the second quarter were healthy, however, they were "less favorable" as compared to the same quarter last year, particularly in terms of the falling Gulf Coast 5-3-2 crack spread and the shrinking Midland crude differentials (between WTI Midland and WTI Cushing). This had a negative impact on Delek's refining margin in its previous quarterly results as compared to the same quarter in 2012. The refining segment's contribution margin in the previous quarter dropped by 29.8% YoY to $95.8 million. The lower margins ended up dragging the company's quarterly net income from $67.8 million in Q2-2012 to $46.6 million in Q2-2013. The business's refining segment is discussed in greater detail later in the article.

Refining Industry: Signs of improvement

However, Delek has been recently upgraded to a buy by Goldman Sachs which caused a +5% increase in its share prices. Goldman Sachs is now turning bullish on the sector which has been operating under …. Read full article at Seeking Alpha