Delek (DK) with an unusual late day trade on 8/23 as 5000 January $25 calls bought the $0.60 offer to open on a 0.45-0.60 wide bid-ask spread. DK has minimal other notable open interest and shares -22% YTD with Energy-related stocks struggling. DK is trading below all key AVWAPs including from the 2020 low but is right at trend support off the lows and just above a key 61.8% Fibonacci.

DK is an integrated downstream energy business focused on petroleum refining, the transportation, storage and wholesale distribution of crude oil, intermediate and refined products and convenience store retailing. DK owns and operates four independent refineries located in Tyler, Texas, El Dorado, Arkansas, Big Spring, Texas and Krotz Springs, Louisiana currently representing a combined 302,000 bpd of crude throughput capacity. The logistics segment consists of Delek Logistics, a publicly-traded master limited partnership, and its subsidiaries. Delek’s retail segment includes the operations of 250 owned and leased convenience store sites.

DK has a market cap of $1.3B and trades 6X EBITDA and 3.45X FCF with a near 5% dividend yield. DK valuation on P/FCF is near a decade-low while EV/EBITDA NTM the 54^th percentile. Forward estimates have been declining the last few quarters. DK is confident that the assets acquired through DKL will be in the right buckets and will result in a better EBITDA per barrel. Management stated that bringing the support assets back into DK would be margin-enhancing due to the optimization opportunities available for each site, such as increased octane capability, the ability to sell more high-octane products, and the conversion of diesel to jet fuel. Additionally, the extension and amendment of the contracts between DK and DKL will improve DK refining profitability and enhance future capture rates. The company has made significant progress towards its target cost structure of $5.50 per barrel in Big Spring, but there are still ongoing programs aimed at long-term improvements. The company expects to reach the target cost structure by the end of the year, at which point it will be sustainable.

On August 1, DK announced the sale of its retail segment to FEMSA through an all cash transaction of $385M. DK also entered into a 10-year fuel supply agreement with FEMSA and will look to build on this partnership going forward. Management reiterated their plan to use the cash for balance sheet improvement as well as shareholder returns including a sustainable and growing dividend while reiterating no interest in Refining M&A.

Analysts have an average target of $24.50 and short interest elevated at 9.5 % of the float but down from recent 14% highs. MSCO has a $24 target but looks for more consistent execution and cost improvements before becoming more constructive. JPM has a $23 target but sees little reason for improvement to crack spreads in 2H24 outside of hurricane damage disrupting supply.