Seeking gas gains, not pains
The Israeli energy conglomerate Delek is set to list its U.S. division on the NYSE.
By Grace Wong, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - A diversified energy business expected to list on the Big Board this week is setting its sights on breaking big in the United States.

Delek U.S. Holdings is being spun off by parent Delek Group, the Israeli oil conglomerate controlled by real estate mogul Yitzhak Tshuva - who made headlines here after buying New York's Plaza Hotel. Delek Group will own about 80 percent of the company after it goes public.

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Delek U.S., which operates retail gas outlets in the South, as well as an independent oil refinery, plans to sell 10 million shares to underwriters Wednesday at an estimated price between $14 and $16 a share. The company aims to list on the New York Stock Exchange under the symbol "DK." Lehman Brothers and Citigroup are the lead underwriters of the deal. (Click here for a look at all of this week's IPOs.)

The company is banking on its ability to handle gas from the refinery to the pump. Based in Franklin, Tenn., it runs about 350 gas and convenience stores in the South, an independent refinery in Tyler, Texas as well as a wholesale fuel distribution operation.

Investors have loaded up on their share of oil and gas stocks, leading some in the sector to consider energy plays an also-ran. But with oil prices back on a rampage, Delek is looking like a pretty sweet deal, according to Ben Holmes, head of Morningnotes.com, an IPO research firm.

"With oil prices up $15 more a barrel this year, that says to me the game's still on and there's still room for these deals," he said. Crude prices broke through the $75 a barrel in late April, and while they've eased since then, they're still up about 17 percent this year.

The most recent IPO in the oil patch priced at $24 a share, the upper end of its estimated range. Since it debuted on the New York Stock Exchange a little more than a week ago, Complete Production Services (Research), an oilfield services provider, has gained about 9 percent over its offer price.

Bigger is better

Acquisitions drive Delek's business. The company was formed in 2001 to buy gas and convenience stores from The Williams Companies (Research). It expanded into wholesale fuel distribution in 2004, and last year it bought its Tyler refinery.

The buying spree has fueled Delek's sales and earnings, which have increased annually since 2003. The company said it earned $64.1 million net last year on revenue of $2 billion. It's difficult to compare year-to-year results, though, because of the impact of acquisitions.

Delek said it plans to use the proceeds from its IPO to pay back debt and make improvements to its refinery and retail stores. It also plans to use the money raised to fund future acquisitions.

The company's retail gas and convenience stores are based mainly in Tennessee, Alabama and Virginia and it's betting it'll have more opportunities to buy smaller players as it leverages its scale in those markets.

But its refining operations may turn out to be the big winner for its business. Refining costs and profits account for nearly one-fifth of the retail price of gasoline, according to the Energy Information Administration. That's almost 58 cents a gallon at current pump prices, which are averaging $2.92 a gallon nationwide. Last year, refining accounted for nearly half of Delek's revenue.

Delek expects the refining crunch in the United States to boost business. But with only one refinery in its portfolio, Delek's reach is still tiny compared to that of industry giant Valero (Research), which operates about 18 refineries in the nation.

Furthermore, refining margin - an indication of profitability - is volatile and could decline as a result of increases in crude prices, Delek said in its prospectus. Since the firm operates solely in the South, a downturn in the regional economy also could hurt its business.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.