FLLDL

Seems unlikely that this will work out for Delta in the end, but if you are consuming $12B per year worth of something I suppose it is worth trying some creative approaches.

Refining business has been brutal of late so they are likely getting a very distressed price vs the new build cost of a green field refinery.

ClipperDelta

The very very short summary of it, based on a few articles in the last few days is this:

- Delta will buy the refinery and get it back into shape
- JP Morgan will finance the entire oil procurement and refining process, including buying the crude oil from Nigeria, shipping it to PA, and refining it.
- JP Morgan will then sell the refined jet fuel to Delta at wholesale prices
- Other refined non-jet-fuel products will be sold to Conoco and/or other oil companies either for cash or in exchange for more jet fuel for Delta....

Incidentally, Delta has recently hired an ex-Merrill Lynch oil trader, moved its jet fuel procurement division into Treasury services (thus viewing it more as a financial activity rather than an operational one), and even has a subsidiary Monroe Energy LLC that is being used for this deal.

JP Morgan by being involved would get real-time insight into supply-and-demand of certain oil futures contracts

http://www.reuters.com/article/2012/...etsNews&rpc=43

Vuelos

As usual, your posts provide very interesting insight.

JC1120

Being in the industry, this is a REALLY REALLY bad idea. Refining margins are next to nill. They'd not only need to figure out how to run the refinery as efficiently as possible, which is hard enough for a refining company like Valero, but for execs that barely know how to run their own airline, how are they going to be counted on to run this business properly?

Secondly, this is an old refinery. They would have to deal with the environmental nightmares of upgrading/running one of these things in the northeast. And, when this venture inevitably fails, good luck finding someone to unload it to. Delta will then get stuck with the environmental liability and the lawsuits that are come with the territory. Oil companies won't permanently shut down refineries in many places even though they're old and outdated because doing so would require them to dismantle and clean-up their toxic sites at costs Delta can't even begin to imagine paying for. This could be precisely the reason JPMC won't buy the darn thing themselves.

StayingHomeIsBetter

^^^

All very good points.

There are a number of shut down refineries that have, or soon will be, converted into storage terminals by the current owners. Why? Because to cease all operations and permanently dispose of the property, the owner would have to remediate all of the environmental issues on the site, at exorbitant costs.

A large petroleum company can find a way of making use of another terminal. It would seem less likely that an airline, after a flash-in-the-pan foray into the refining business, would be as conveniently able to do so.

FWAAA

I realize that Delta has a fuel cost problem, just like every other airline. Delta bought more than 3.8 billion gallons of jet fuel last year at an average price of $3.06/gal. That price included the benefits of $420 million of hedging gains.

So far this year, fuel prices are up substantially and some airlines are projecting a full-year price of more than $3.50/gal.

I had no idea that Delta's fuel price problem (which is essentially an oil price problem) could be remedied by purchasing and operating a Philadelphia-area oil refinery that its owner, ConocoPhillips, has shuttered due to constant losses. A refinery that is built to refine the expensive Brent crude from the North Sea or Africa - oil that for the past year has been running $15 to $20/bbl more than WTI, the somewhat plentiful crude found in OK at the terminus of the existing pipleline at Cushing.

And now, the script is that Delta, being an expert at buying and burning jet fuel, and JP Morgan, an expert in finance, can somehow team up to buy, refurbish and operate a refinery more efficiently and profitably than its previous oil company owner, netting Delta untold riches in jet fuel savings.

This refinery, of course, does not sit on a pool of proven reserves of the very expensive part of the equation - oil. Every drop of crude refined into gasoline, diesel, kerosene and, yes, some jet fuel, must be purchased in the open market. DL currently buys every drop of its jet fuel needs in the open market but thru the miracle of high-finance, DL will be able to buy the expensive Brent crude at better prices than ConocoPhillips or DL will be able to operate the refinery more cheaply/efficiently than its previous owner.

It's like a multi-week April 1 story. My guess is that DL is up to something that doesn't involve buying an oil refinery and has spun this tale to divert attention.

DLdweeb

What am I missing?

This refinery was run by a petroleum industry giant for decades, apparently generating consistent losses (in recent years).

Said giant has demonstrated expertise in running refineries.

Because of its location, this refinery generally has to use higher priced crude to makes its end products.

DL and JPM, both entities with zero expertise in refining, somehow feel they can run this facility and generate an acceptable ROI.

JPM will sell the jet fuel to DL at wholesale prices. Said wholesale prices are not enough to cover operating costs, given the plant has run at a loss in recent history. Who covers these refining losses?

Correct so far? Again, what am I missing?

HongKonger

JPM almost certainly has something up its sleeve. All the Wall Street banks do. The less sense made by an action taken by a Wall Street bank, the more sure you can be that someone somewhere at that bank definitely knows what they are doing and that someone else somewhere outside the bank is going to be very very unhappy some months or years down the road (not necessarily DL though).

DLdweeb

I don't necessarily disagree that there are other motives to this deal that are not obvious. The only thing I can think of is perhaps JPM sees this plant as having potential value at some point in the future (perhaps when distribution and pipeline situations are improved), when it can be sold at a profit. In the meantime, for the plant to hold value it needs to be running and not rotting away, hence this deal. Nothing else makes sense.

FWAAA

From what I've read, it's not the location that requires the use of the more expensive crude, it's the design of the refinery. Apparently, refineries are built (or at least this one was built) with specific crude oil in mind and they can't necessarily switch crude supplies.

azeckel

JPM is definitely buying up all these distressed assets to then bundle together into securities that they can sell on the open market. You see, when you have a bunch of crappy things bundled together, they all of a sudden become wonderful investment devices. I wish there was some precedent we could look at to tell if this is a good idea or not...

motytrah

In the grand tradition of Monday Morning QBing on FT that would be a good thing. They would have to have some sort of prospectus for the instrument. That would likely shed some light on the deal.

StayingHomeIsBetter

Exactly. For example, some refineries are designed to only process low sulfur (sweet) crude. Critical equipment is not fabricated from the more corrosion-resistant alloys that are required for processing the more corrosive high sulfur (sour) crudes.

Sweet crudes tend to be more expensive.

There are other crude characteristics that have a bearing on refinery design. Bottom line, a refinery can be rather constrained when it comes to selection of crude types/sources.

Some info on the Trainer refinery:

http://abarrelfull.wikidot.com/trainer-refinery

WhiskeyBravo

While I agree with what seems to be sound logical outlook on the potential negatives of this deal, it seems to me that before I bought a billion dollars worth of anything, I would hire some outside experts.

For DL to enter this deal with as much information as the armchair QB'ing here feels a bit naive to me. Then again, I don't get to sit at C.E. Woolman's desk everyday.....

hazelrah

Gentleman and Gentleladies,

With a nod to Wall Street, the oil markets, and some of U.S industry in general-

I'm shocked, shocked to find that there is gambling going on in this establishment.