Could Delek US Holdings Have A 47% Upside? Wells Fargo Thinks So

Delek US Holdings, Inc. DK reported better-than-expected third quarter results, thanks in part to the impact of hurricane season on its business. The positive financials — as well as remarks from Delek management at a Wells Fargo event last week — have turned the research firm incrementally positive on the oil logistics company. 

The Analyst 

Wells Fargo analyst Roger Read upgraded shares of Delek US Holdings to Outperform and lifted his price target from $29 to $40, suggesting roughly 47 percent upside from current levels. 

The Thesis

An updated sum-of-the-parts valuation for Delek, estimates and expectations have moved higher based on both greater and quicker savings and synergies related to the ALJ merger and sustainably wider WTI-Midland differentials, Read said. (See Read's track record here.) 

The differentials should help the company post a positive fourth-quarter result, "which could prove to be the catalyst to lift the share price closer toward our updated price target," the analyst said. 

Wells Fargo raised its earnings per share estimate for 2017 from $0.79 to $1.03, for 2018 from $1.05 to $1.16 and for 2019 from $1.70 to $1.95.

See also: WTI Oil Forecast: Looking Toppy, But Downside Limited

"Based on our updated estimates, the pace and magnitude of the merger synergies, expected debt retirement and the current balance sheet strength, we believe that DK will be able to implement a two-year share repurchase program during 2018/2019," Read said. 

Delek has decided to move forward with the Krotz Springs alkylation unit for $103 million, with the company aiming for completion in the first quarter of 2018. Delek expects $18-21 million in incremental annual net income and $35-40 million in incremental annual EBITDA, according to Wells Fargo. 

With oil prices likely to go up, Wells Fargo said there's upside potential to Delek's stated economics.

The Price Action

Delek US Holdings shares have gained 15.33 percent year-to-date. 

At the time of writing, the shares were rallying 2.33 percent to $27.86.