The recent Delek Logistics Partners (DKL) Q1 2024 earnings call was, by all appearances, a standard affair. Solid performance, continued growth in the Permian Basin, a distribution increase – the usual story we've come to expect from DKL. But beneath the surface, a subtle shift is occurring, one that hints at a potentially massive opportunity for the company and its investors: Delek Logistics is quietly becoming a dominant player in the natural gas infrastructure of the Delaware Basin.

While analysts focused on the typical metrics like EBITDA, volume growth, and contract renewals, a few key statements from Avigal Soreq, DKL's President, slipped under the radar. These statements, coupled with some intriguing financial data, suggest that DKL is strategically positioning itself to capitalize on the rapidly expanding natural gas production in the Delaware Basin. This burgeoning sector of the Permian is experiencing a surge in demand for gathering, processing, and transportation infrastructure, and DKL is poised to become a key provider of these crucial services.

Here's what caught my attention. Soreq, in response to a question about the performance of the 3 Bear assets (now DDG), stated that DKL is "happy around it" and that the acquisition has provided "insight for more opportunities we see in the region." He specifically highlighted "additional opportunity mainly on the natural gas." This seemingly offhand remark holds significant weight, especially when we consider DKL's historical focus on crude oil gathering and processing.

Delek Logistics started in 2012 as a classic drop-down story, primarily servicing its parent company, Delek US Holdings. It wasn't until 2016 that the company began actively pursuing third-party business, focusing primarily on crude oil infrastructure in the Permian. Now, approximately 50% of DKL's EBITDA originates from third-party business, a testament to the company's successful growth strategy. However, this strategy has largely centered around crude oil, making Soreq's emphasis on natural gas particularly noteworthy.

Further supporting this hypothesis is DKL's recent financial maneuvering. The company completed a combined debt and equity offering, boosting its liquidity to approximately $800 million, a substantial increase from the $300 million it held prior to the transaction. Reuven Spiegel, DKL's CFO, explained that this move was partially motivated by the desire to "finance the acquisition" of 3 Bear, hinting that the original $200 million equity portion of the financing was intended for further expansion related to the acquisition.

This significant increase in liquidity, coupled with DKL's stated intent to reduce leverage below four times, sets the stage for aggressive growth initiatives. While acquisitions are certainly on the table, the company has demonstrated its ability to grow organically, as evidenced by its impressive Midland Gathering system. This system, built from the ground up, now gathers up to 230,000 barrels per day and boasts approximately 350,000 dedicated acres contracted until 2030.

DKL's EBITDA Growth

The following chart shows the historical and projected EBITDA growth for DKL, with a potential surge driven by expansion into the Delaware Basin's natural gas infrastructure.

If DKL were to replicate this success in the Delaware Basin's natural gas sector, the impact on the company's financials could be substantial. Current natural gas production in the Delaware Basin is estimated to be around 14 billion cubic feet per day, and this number is expected to grow significantly in the coming years. Assuming DKL captures even a small fraction of this market, the additional EBITDA generated could easily push the company's quarterly run rate well beyond the $100 million mark.

The implications for investors are clear. A successful foray into the Delaware Basin's natural gas infrastructure could unlock significant value for DKL unitholders. The company's proven track record of growth, combined with its strengthened financial position and access to a booming market, makes this a compelling opportunity. While the market may not have picked up on the subtle hints dropped during the Q1 earnings call, those paying close attention may find themselves handsomely rewarded in the years to come as Delek Logistics transforms itself from a quiet giant to a dominant force in the heart of the Permian Basin.

"Fun Fact: Did you know that Delek Logistics' headquarters is located in Brentwood, Tennessee, a city known for its beautiful parks, thriving arts scene, and vibrant community? Perhaps this serene environment is what allows DKL to develop its strategic growth plans with such quiet confidence."