Delek Logistics Partners (DKL 0.88%) has quietly put up an impressive dividend growth track record. The energy master limited partnership (MLP) has increased its payout every quarter for nearly a decade. That's impressive, considering that many of its MLP peers have had to reduce their payouts due to all the volatility in the energy sector during that period.
Delek Logistics Partners currently offers a 7.3% yield that it expects to continue growing. Investors won't want to miss this company's passive income-generating potential.
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Rock-solid footing
Delek Logistics Partners is coming off another year of delivering solid growth. The MLP grew its earnings before interest, taxes, depreciation, and amortization (EBITDA) by 9% in the fourth quarter of 2021. That gave it the fuel to increase its distribution by 7.1% over the past year. As a result, it delivered on its goal of giving investors at least a 5% raise in 2021.
The company ended the year with a solid distribution coverage ratio of 1.27, even with that increase. Furthermore, it has a relatively conservative leverage ratio of 3.4 times debt to EBITDA. Both numbers have improved from their average in 2019, suggesting its high yield dividend is on a firm foundation heading into 2022.
The fuel to continue growing
With oil and gas prices surging in recent months, producers are drilling more wells. Those strong market conditions are providing Delek Logistics Partners with more organic growth opportunities for its gathering business. It anticipates investing $59 million on high return capital projects this year. These investments will provide it with some incremental cash flow in 2022.
In addition, the company's parent, refiner Delek (DK -1.31%), doesn't have any major planned maintenance projects in its refining system this year. Delek Logistics therefore expects to deliver strong volumes to Delek's refineries in 2022, which should provide it with solid cash flows.
Along with its strong financial profile, these factors give Delek Logistics the confidence that it can grow its distribution by another 5% in 2022.
Adding more fuel to the distribution growth engine
While Delek Logistics already had the cash flow to deliver on its 2022 distribution growth target, that didn't stop it from adding more fuel. The MLP recently agreed to buy 3Bear Energy for $624.7 million in cash in a deal that should close around mid-year. 3Bear operates a premier crude oil, gas, and water gathering, processing, and disposal business in the Northern Delaware Basin, expanding the company's Permian Basin operations to the other side of the basin. The deal will be immediately accretive to cash flow while enhancing its third-party revenue and diversifying its customer and product mix.
There's also lots of future upside potential. As the Delaware Basin is one of the country's most prolific oil and gas basins, Delek Logistics should be able to capture additional expansion opportunities as producers grow their volumes in the region. Meanwhile, future optionality through carbon capture and storage opportunities.
The transaction supports the company's plan to grow its distribution at a 5% annual rate. It will enhance its distribution coverage ratio in the near term, enabling it to retain cash to reduce the leverage it will take on to close the transaction. That will improve its financial flexibility to make future growth-focused investments. Those could include new organic expansions, third-party acquisitions, or additional drop-down transactions with Delek.
A proven passive income producer
Delek Logistics Partners has increased its cash distribution to investors every quarter for nearly a decade. That streak is showing no signs of ending soon. It already had enough fuel to grow its payment by 5% this year before enhancing its growth capabilities by agreeing to buy 3Bear Energy. With increasingly visible growth, income investors won't want to continue overlooking this under-the-radar MLP.
