Delek US Holdings (NYSE: DK) operates as a diversified energy company with a focus on petroleum refining and logistics. The company runs four refineries across Texas, Arkansas, and Louisiana with a combined capacity of 302,000 barrels per day.
It also owns Delek Logistics Partners, a master limited partnership that handles midstream operations, including pipelines, storage terminals, and water disposal services. (Marc evaluated the partnership and its double-digit yield in his Safety Net column in March.)
Looking at Delek US Holdings’ stock chart tells a sobering story. After trading above $30 in early 2024, shares have tumbled dramatically to around $21. That’s a painful drop of roughly 30%.
The company’s recent first quarter results help explain the stock’s poor performance. Delek reported a net loss of $172.7 million, or $2.78 per share – a sharp deterioration from the $32.6 million loss in the same quarter last year. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) fell to just $26.5 million compared with $158.7 million in Q1 of 2024.
What’s driving these disappointing numbers? The main culprit is the company’s refining business, which has been hammered by lower crack spreads. During the first quarter, Delek’s benchmark crack spreads were down nearly 30% from prior-year levels. This squeezed the company’s ability to generate profits from turning crude oil into gasoline and diesel.
Delek’s refining segment posted an adjusted EBITDA loss of $27.4 million versus a $110.1 million gain last year. Meanwhile, its logistics operations provided some relief with adjusted EBITDA of $116.5 million, up from $99.7 million.
Management is taking steps to improve the situation. They’re pushing forward with their Enterprise Optimization Plan, which they expect will deliver at least $120 million in cash flow improvements by the second half of 2025. The company is also working to reduce its ownership in Delek Logistics Partners as part of a broader strategy to unlock value.
But here’s where things get tricky from a valuation standpoint.
At first glance, Delek might look reasonably priced. Its enterprise value-to-net asset value ratio sits at 7.85, which is actually 36% below the average of 12.37 for companies with positive net assets. In other words, you’re paying less for each dollar of Delek’s assets than you would for most other companies.
However, that discount exists for good reason.
Delek has posted negative free cash flow in each of the past four quarters. Its quarterly free cash flow averaged -28.10% of its net assets during that span. That’s actually much better than the -69.87% average for companies with similarly poor cash flow generation, but it’s still far from ideal.
Think of it this way: Delek is like a store that’s selling goods below cost. Sure, the assets might be cheap, but if the business can’t generate positive cash flow, that bargain price becomes meaningless.
The energy sector has always been cyclical, and refining margins can swing wildly based on crude oil prices and product demand. But Delek’s consistent inability to generate positive cash flow over an entire year raises questions about the sustainability of its business model in the current environment.
The company does have some positives worth noting. Its logistics segment continues to perform well, and management expects the Enterprise Optimization Plan to deliver meaningful improvements. Delek also maintains a reasonable balance sheet with $623.8 million in cash.
Yet when we weigh Delek’s asset valuation against its poor cash generation, the stock appears significantly overvalued despite its recent decline. The market’s discount reflects real operational challenges that management is still working to address.
The Value Meter rates Delek US Holdings as “Extremely Overvalued.”
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