DL Purchases Refinery from COP for $150m - Potential for UA to do the Same?
May 1, 2012, 12:02 am
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DL Purchases Refinery from COP for $150m - Potential for UA to do the Same?
Just caught this article and seems like DL is taking quite a bold step to control fuel costs -- can't but help wonder if UA, once the merger pains settle, or the other majors will follow suit.
<snip>
Delta said Monday that it will pay $150 million for a refinery near Philadelphia that is being sold by division of ConocoPhillips. It’s aiming to slice $300 million a year from its jet fuel bill.
Jet fuel is the refinery product that garners the fattest profit margin, “and they’re taking it from airlines,” Delta CEO Richard Anderson said.
<snip>
“If this works, you’re going to see everybody doing it,” said Ray Neidl, an airline analyst with the Maxim Group.
Delta can’t just buy the refinery and pump out nothing but jet fuel. Refining crude oil yields different products — including diesel fuel, gasoline, and jet fuel — at different points in the process.
But Delta did say it plans to spend $100 million to modify the refinery in Trainer, Pa., to maximize the amount of jet fuel it produces. Jet fuel is currently 14 percent of the refinery’s output, according to Delta. It plans to boost that to 32 percent.
<snip>
The gasoline, diesel fuel and other products the refinery makes will be swapped with BP and the ConocoPhillips division, Phillips 66, for jet fuel to be delivered to Delta elsewhere in the U.S. Delta aims to fill 80 percent of its U.S. fuel needs this way.
But refining, the practice of taking crude oil and turning it into fuels, is notorious for boom-and-bust cycles. ConocoPhillips and other oil giants are getting out of the business because it hasn’t been consistently profitable.
Refineries are paying high prices for oil, particularly on the East Coast, where they import a lot of more-expensive oil. At the same time, demand for gasoline has fallen because of the weak economy and cars getting more miles per gallon.
As a refinery owner, Delta will still need that more-expensive crude oil to make jet fuel.
<snip>
Airlines have been trying to combat rising fuels cost by purchasing more fuel-efficient airplanes and experimenting with different types of fuels. But neither is an immediate solution; it can take a decade to modernize an entire fleet and biofuels, which are made from plants, are not economically feasible.
Airlines also try to limit their exposure to big price spikes through a process known as hedging. The catch: if prices fall dramatically, they end up losing a lot of money.
Source
Delta said Monday that it will pay $150 million for a refinery near Philadelphia that is being sold by division of ConocoPhillips. It’s aiming to slice $300 million a year from its jet fuel bill.
Jet fuel is the refinery product that garners the fattest profit margin, “and they’re taking it from airlines,” Delta CEO Richard Anderson said.
<snip>
“If this works, you’re going to see everybody doing it,” said Ray Neidl, an airline analyst with the Maxim Group.
Delta can’t just buy the refinery and pump out nothing but jet fuel. Refining crude oil yields different products — including diesel fuel, gasoline, and jet fuel — at different points in the process.
But Delta did say it plans to spend $100 million to modify the refinery in Trainer, Pa., to maximize the amount of jet fuel it produces. Jet fuel is currently 14 percent of the refinery’s output, according to Delta. It plans to boost that to 32 percent.
<snip>
The gasoline, diesel fuel and other products the refinery makes will be swapped with BP and the ConocoPhillips division, Phillips 66, for jet fuel to be delivered to Delta elsewhere in the U.S. Delta aims to fill 80 percent of its U.S. fuel needs this way.
But refining, the practice of taking crude oil and turning it into fuels, is notorious for boom-and-bust cycles. ConocoPhillips and other oil giants are getting out of the business because it hasn’t been consistently profitable.
Refineries are paying high prices for oil, particularly on the East Coast, where they import a lot of more-expensive oil. At the same time, demand for gasoline has fallen because of the weak economy and cars getting more miles per gallon.
As a refinery owner, Delta will still need that more-expensive crude oil to make jet fuel.
<snip>
Airlines have been trying to combat rising fuels cost by purchasing more fuel-efficient airplanes and experimenting with different types of fuels. But neither is an immediate solution; it can take a decade to modernize an entire fleet and biofuels, which are made from plants, are not economically feasible.
Airlines also try to limit their exposure to big price spikes through a process known as hedging. The catch: if prices fall dramatically, they end up losing a lot of money.
Source
May 1, 2012, 12:18 am
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Purely uninformed opinion: I have no idea about the cost of operations of this refinery, but wouldn't it be easier for Delta to purchase some derivative financial instrument than to get involved in owning a refinery?? And, I'm guessing they didn't exactly luck out to buy the cheapest or best operating refinery if someone was willing to sell it...
May 1, 2012, 1:01 am
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Purely uninformed opinion: I have no idea about the cost of operations of this refinery, but wouldn't it be easier for Delta to purchase some derivative financial instrument than to get involved in owning a refinery?? And, I'm guessing they didn't exactly luck out to buy the cheapest or best operating refinery if someone was willing to sell it...
May 1, 2012, 6:57 am
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Out of the Box
I think its a brilliant, out of the box move on the part of DL. Looks like the "experts" are mixed, some saying it's an amazing opportunity and others saying it'll be a big bomb. Either way, it shows DL management is actually trying novel solutions to curb their biggest expense...and for that, I give them a lot of credit.
Sadly, I can't see UA being that innovative. I don't think the senior management team has the imagination to bring about this type of innovation there.
Sadly, I can't see UA being that innovative. I don't think the senior management team has the imagination to bring about this type of innovation there.
May 1, 2012, 7:12 am
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I doubt it - not only is this a risky gamble on Delta's part, but this refinery is supposedly somewhat unique in its design relative to other units on the market that allows for maximization of jet fuel production. I just hope they're prepared for the environmental nightmares that come along with owning a facility of this age. Also interesting how Tosco paid BP $59MM for the refinery in 1996 - wonder what justified the additional premium given that these assets generally depreciate.
May 1, 2012, 7:57 am
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DL Purchases Refinery from COP for $150m - Potential for UA to do the Same?
Out of the box thinking, yes, but also a terrible idea, IMHO.
I have no idea what it takes to run a refinery, but am also pretty certain an airline (any airline) doesn't either. An airline's time is probably much better spent actually running an airline. From my experience on DL, they have a lot of work to do in that category before Moving into other industry.
I have no idea what it takes to run a refinery, but am also pretty certain an airline (any airline) doesn't either. An airline's time is probably much better spent actually running an airline. From my experience on DL, they have a lot of work to do in that category before Moving into other industry.
May 1, 2012, 8:23 am
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May 1, 2012, 8:28 am
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Whatever. I'm pretty sure Delta is aware that it requires separate expertise to run a refinery. Maybe that's why they set up a separate subsidiary, Monroe Energy, to run the refinery and has hired an oil industry veteran to run the subsidiary.
Also, while there are instruments to hedge the price of oil, there is apparently nothing equivalent for hedging refining costs and the crack spread --
"The price of crude oil itself can be hedged through financial bets. But the price of refining it into jet fuel can’t be hedged, noted Anderson, Delta’s CEO."
Also, while there are instruments to hedge the price of oil, there is apparently nothing equivalent for hedging refining costs and the crack spread --
"The price of crude oil itself can be hedged through financial bets. But the price of refining it into jet fuel can’t be hedged, noted Anderson, Delta’s CEO."
May 1, 2012, 8:31 am
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I have no idea what it takes to run a refinery, but am also pretty certain an airline (any airline) doesn't either. An airline's time is probably much better spent actually running an airline. From my experience on DL, they have a lot of work to do in that category before Moving into other industry.
May 1, 2012, 12:10 pm
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This is just an "out of the box" method for an airline to lose money IMHO. Isn't it telling that COP, who knows how to run refineries, wanted to shut it down? This specific refinery is also at a disadvantage because it must take more expensive grades of crude.
There are other corporate support staff that Delta probably did not get. Usually the decisions on what crudes to buy and how to operate the overall refinery is handled by corporate staff after running LP simulations on supercomputers over night.
Why would Delta need to know anything about running the refinery? they bought the refinery, including its staffing and management. I don't know that it was a good idea, I suppose the idea is to control the crack spread (which is very low right now anyways, if refining there was profitable, Conoco wouldn't have been selling or shutting it down). It won't help one bit with the cost of crude.
May 2, 2012, 5:41 am
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Interesting Deal
What I thought interesting about the deal was that the refinery will also produce other products such as gasoline which is being bartered with other fuel companies elsewhere in the country for jet fuel in other airports.
While not exactly a large market for Delta, Philly is definitely showing them some love; by bringing back lots of jobs to Philly to man the refinery, Delta has earned considerable good will from the town. Whether that translates into more local business for them, who knows, but I still have to commend Delta for trying something out of the box that I think will work for them.
While not exactly a large market for Delta, Philly is definitely showing them some love; by bringing back lots of jobs to Philly to man the refinery, Delta has earned considerable good will from the town. Whether that translates into more local business for them, who knows, but I still have to commend Delta for trying something out of the box that I think will work for them.
May 2, 2012, 6:45 am
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Why would Delta need to know anything about running the refinery? they bought the refinery, including its staffing and management. I don't know that it was a good idea, I suppose the idea is to control the crack spread (which is very low right now anyways, if refining there was profitable, Conoco wouldn't have been selling or shutting it down). It won't help one bit with the cost of crude.
Last edited by 9elf S; May 2, 2012 at 7:12 am
May 2, 2012, 7:58 am
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Curious decision, will be interesting to see how it plays out.
I spent a few months (on a legal internship) at a mid-size oil company that owned two refineries, one on the East Coast and another in the Caribbean. It was well-known that refining was the lowest-margin business for the company, and in the time since I left, the larger of the two refineries was closed due to staggering losses, in excess of $1b in a few years.
Even if DL thinks it can make a few cents off the Jet-A crack spread, refining is a capital-intensive, low-margin industry... wait a minute... sounds just like an airline!
I spent a few months (on a legal internship) at a mid-size oil company that owned two refineries, one on the East Coast and another in the Caribbean. It was well-known that refining was the lowest-margin business for the company, and in the time since I left, the larger of the two refineries was closed due to staggering losses, in excess of $1b in a few years.
Even if DL thinks it can make a few cents off the Jet-A crack spread, refining is a capital-intensive, low-margin industry... wait a minute... sounds just like an airline!
