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Delta Buying Oil Refinery

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CNBC is reporting that Delta is looking into buying a Conoco oil refinery. The analyst's are saying , good move. Never done before in the airline industry.

I've often wondered why WestJet would not consider doing the same. We are close to the raw material which sells at a crazy discount (around $60/bbl) due to pipeline restrictions. Build a facility that produces jet fuel only to avoid higher costs of cracking more refined fuels. I talked to Clive about it years ago. His response was... too expensive. Maybe not these days.

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CNBC is reporting that Delta is looking into buying a Conoco oil refinery. The analyst's are saying , good move. Never done before in the airline industry.

I've often wondered why WestJet would not consider doing the same. We are close to the raw material which sells at a crazy discount (around $60/bbl) due to pipeline restrictions. Build a facility that produces jet fuel only to avoid higher costs of cracking more refined fuels. I talked to Clive about it years ago. His response was... too expensive. Maybe not these days.

The question is whether there is a spare refinery in Western Canada. I doubt it. New ones are frightfully expensive, which is why none have been built in North America. And there is no such thing to my knowledge that produces jet fuel only. You refine crude into many products, and jet, like its close cousin, heating oil, is just one pulled out of the mix at different refining stages. And you still have the same basic input cost - crude. Also, what happens if you have a refinery fire at a one-refinery company? Refinery fires are fairly common. If you are captive to your own refinery and it goes down, you go to the end of the line in lining up replacement stock, probably paying more than the bulk contract rates your competitors have locked into.

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Wasn't Branson doing this a few years ago for Virgin in the UK?

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These stories spring up every now and again. Yes Richard Branson was mentioned a while back.

The problem is that oil refineries are not very profitable. All the money in oil is at the upstream end. Refining and distribution has usually been a break even business for quite a few years now. This refinery would not be on the market right now if it was wildly profitable.

I expect this story to fade to oblivion.

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Buying a refinery makes sense if you are in the oil business, but it makes no sende if you are in the airline business.

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The problem is that oil refineries are not very profitable. All the money in oil is at the upstream end. Refining and distribution has usually been a break even business for quite a few years now. This refinery would not be on the market right now if it was wildly profitable.

Just wondering on what basis you found that assertion. I have and had family in the oil refining business including the production of LNG and gasoline and though it's all "greek" to me, according to their reports at family gatherings, they do not share your opinions.

And my brother, by the way, much like CR, generates a LOT of his money from options provided by the refining company by which he is employed.

Edited by UpperDeck

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Just wondering on what basis you found that assertion. I have and had family in the oil refining business including the production of LNG and gasoline and though it's all "greek" to me, according to their reports at family gatherings, they do not share your opinions.

And my brother, by the way, much like CR, generates a LOT of his money from options provided by the refining company by which he is employed.

I base my comment on the annual reports of the major integrated companies, especially of Imperial Oil, which breaks out their figures well (and of whose stock I hold a few shares still!).

This past year was remarkably profitable for Imperial, both upstream and downstream, but downstream profit is still barely 25 percent of their total. The previous two years downstream contributed less than 20 percent of profit. Imperial refineries buy most of their oil from other suppliers.

Suncor is the only other major Canadian refiner whose figures are easily available. They are a bit smaller, and their downstream has varied more recently, but last year downstream was about 40 percent of total profits. Of course, they differ from Imperial is some important ways. These last few years have been good for integrated oil companies, but upstream continues to be where most of the profit is.

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I base my comment on the annual reports of the major integrated companies, especially of Imperial Oil, which breaks out their figures well (and of whose stock I hold a few shares still!).

This past year was remarkably profitable for Imperial, both upstream and downstream, but downstream profit is still barely 25 percent of their total. The previous two years downstream contributed less than 20 percent of profit. Imperial refineries buy most of their oil from other suppliers.

Suncor is the only other major Canadian refiner whose figures are easily available. They are a bit smaller, and their downstream has varied more recently, but last year downstream was about 40 percent of total profits. Of course, they differ from Imperial is some important ways. These last few years have been good for integrated oil companies, but upstream continues to be where most of the profit is.

Well done!!

Dad was with Standard Oil (after IOL) and brother with Suncor. He told me what they generated in revenues from an ethanol conversion. Certainly, his remarks supported the conclusion that money was to be made in refining but as you note---they are a producer. The closure of the refinery in the Caribbean confirms that a "stand alone" operation has many hurdles.

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I think it's a pretty smart move, but hey, what do I know?

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.

some additional info

Delta’s refinery bid looks better on second glance

April 30, 2012 - Reuters

By Janet McGurty

Delta Air Lines’ expected bid to buy a Pennsylvania oil refinery has had people in both industries joking that a company from the money-losing airline sector would be right at home in the money-losing world of East Coast refining.

But with the deal to buy ConocoPhillips' Trainer, Pennsylvania, refinery expected to be confirmed imminently, some say that Delta, the country's No. 2 carrier, could have the last laugh.

Airlines, after all, know a thing or two about managing high-risk, logistics-intensive industries through a slump. While Delta would be the first airline to buy into the sector, other end-users from Midwest farmers to steel companies have invested in the past; more recently, private equity firms have moved in.

Others say the deal is a defensive one, necessary to help prevent a run-up in fuel costs: the only other bidders for the plant wanted to shut it down and run it as a terminal, a move that could have reduced East Coast jet fuel supplies by more than a fifth and forced Delta to pay more for imports.

And while news of the bid surfaced only a month ago, it doesn't seem to be a hasty decision. Delta sent a team of experienced refinery specialists to examine the plant, which has refining capacity of 185,000 barrels a day, as early as last November, several sources familiar with the deal told Reuters. It established its bidding vehicle Monroe Energy LLC on December 13, 2011, according to Delaware records.

"It is an opportunity risk that Delta faces versus a negative risk exposure," says Geary Sikich, principal of Indiana-based Logical Management Systems, which specializes in assessing business risk and which has helped produce risk-modeling plans for major U.S. refiners.

JP Morgan's involvement in the bid as financier and designated oil trader also raised some eyebrows, yet to many makes good sense. Not only has the bank become the biggest energy derivatives trader on Wall Street, but the refinery's proximity to New York Harbor - the pricing point for gasoline and heating oil futures - makes it especially enticing.

Several sources who have participated in the discussions expect the deal to be announced early next week, around the time of the May 1 spin-off of ConocoPhillips' refining arm into a separate company called Phillips 66.

Under the expected terms, Delta would purchase the refinery for around $150 million - about the cost of a new wide-body jet - and JP Morgan's commodities team would finance the refining process, including buying crude and selling fuel.

'Strange Bedfellows - Delta would not be the first non-energy company to take fuel supplies into its own hands.'

.

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An interesting development. I will be curious to see how it affects their bottom line - is this the next version of Southwest's successful fuel hedging program?

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Speaking of oil/gas

E mail from an Arab student to his Dadtudent sends an e-mail to his dad, saying:

Dear Dad

Berlin is wonderful, people are nice and I really

like it here, but Dad, I am a bit ashamed to arrive

at my college with my pure-gold Ferrari 599GTB

when all my teachers and many fellow students

travel by train.

Your son, Nasser

The next day, Nasser gets a reply to his e-mail

from his dad:

My dear loving son

Two hundred million dollars from American and Canadian gas pumps has just been transferred

to your account. Please stop embarrassing us.

Go and get yourself a train too.

Love,

Dad

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JP Morgan will be the ultimate determining factor in the refinery works for Delta?

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Given the costs involved, a much better scenario would be for a refinery to start its own airline which would be a drop in the bucket, quite literally!! Which is pretty close in the case of Emirates Airlines...

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... or they could do like EK and buy a country. :ninja:

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When an Airline Buys an Oil Refinery

http://www.zerohedge.com/contributed/2012-20-14/when-airline-buys-oil-refinery?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29&utm_content=Google+Feedfetcher

By EconMatters

The biggest news in the airline sector of late is probably the announcement by Delta Airlines to buy a Phillips 66 refinery in Trainer, PA. Delta will pay $150 million for the 180,000 barrels per day (bpd) facility, spend an additional $100 million to upgrade the plant, and get $30 million in state subsidies for infrastructure and to create jobs.

Under the proposal, JP Morgan is reportedly part of the package as well. Delta would purchase the refinery and JP Morgan's commodities team would finance the refining process, including buying and shipping crude oil from overseas. Delta would then buy the jet fuel from JP Morgan at a wholesale rate, and the bank would sell the other products made by the refinery into the market.

The reason behind this unprecedented move is to use the refinery as the ultimate fuel hedge by saving Delta about $300 million a year in jet fuel costs. In our view, despite the optimistic savings projection, there are pros and cons of this deal for Delta.

Pros:

(1) Fuel represents the single biggest expense component of the airline industry. Delta's planes guzzled down 3.9 billion gallons of fuel last year, costing the airline $11.8 billion, or 36% of its operating expenses. So having an East Coast refinery asset could conceivably give Delta better planning and budgeting, and most importantly, pricing power and a cost advantage, particularly in the very competitive North Atlantic market, over its competitors such as American, British Airways

ChartB.png

(2) With JP Morgan bankrolling the whole thing, Delta could benefit from JPM's expertise in the energy trading market, as well as financing, thus reducing the risk of taking on the refinery operation alone.

(3) Regardless of the outcome, Delta management at least took a bold and novel approach using physical asset to hedge fuel, instead of the industry standard paper-based hedging program pioneered by Southwest Airlines.

Cons:

(1) The biggest cost component of jet fuel is crude oil, which means any savings Delta seeks is driven by the crack spread--the difference between the price of a barrel of oil, and sale price of refined product. Trainer plant is one of the older refineries that relies on the most expensive grades of crude oil as feedstock. Even with JPM's backing, what are the odds of an airline and a banker succeeding where Phillips 66 failed?

(2) Refining is not Delta's core expertise. Refinery operation is quite complex, which both Delta and JPM have little experience. Integrating a refinery into Delta's business will be a major challenge distracting Delta's focus. Assuming Delta and JPM can immediately put together an appropriate management team, smooth running will still take at least 2 to 3 years.

(3) We also question if the projected $300 million a year savings includes the cost of running the refinery? Theoretically, if Delta is getting cheaper fuel price from Trainer, that would suggest the refinery most likely is not making money from the transaction.

(4) Furthermore, the jet fuel market on the East Coast has tightened up quite a bit due to the closure the Trainer Plant which accounts for one third of the jet-kerosene capacity in the region. So, re-opening the now idled Trainer refinery could actually increase the jet fuel supply benefiting even Delta's competitors.

(5) Delta seems to have entered this deal out of desperation during the oil price spike from Iran nuclear controversy. If oil price stabilizes or weakens as some of the forecasts seems to suggest, this could well end up being a wasted investment.

With almost every US-based airline in bankruptcy at one time or another, the airline industry in general has not had a very good track record of competent management. On that note, we have to wonder if the money and resource invested in this deal could be better utilized in areas such as customer service and flight safety. After all, price and quality is what matters the most in any business, including airlines.

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Delta refinery yield estimates in question

http://www.flightglobal.com/news/articles/delta-refinery-yield-estimates-in-question-372990/

Atlanta-based Delta Air Lines' plan to increase jet fuel yields to 32% of output at the Trainer oil refinery is meeting scepticism among those familiar with oil refining.

In a landmark deal for the airline industry, Delta announced that it would buy the idled plant outside Philadelphia, Pennsylvania, for $180 million from Phillips in April. It plans to close the acquisition later this month.

The average yield of jet fuel was just 11% for refineries in the continental US in 2011, according to a US Energy Information Administration (EIA) report released yesterday. Some refineries were able to produce yields of between 25% and 29% but only for a few months of the year.

The EIA says that Delta's yield predictions are "higher than was previously seen at Trainer and significantly above the average yield of jet fuel in any US refining region."

The carrier plans to achieve these yields by modifying and improving the existing equipment, and decreasing the output of other products by 18 percentage points from prior output levels, according to a regulatory filing in April.

Delta would have to use medium to light crude oil with up to 90% of the distillates refined into jet fuel to achieve its stated yields, says Flightglobal sister publication ICIS. They add that physical improvements to the plant alone could not achieve a 32% yield.

"I believe [Delta] is being a little too optimistic in its estimates," says ICIS.

The airline declines to comment on its yield estimates.

Delta has stated that it would invest around $100 million in upgrades to the facility, which will be operated and maintained by its newly-created Monroe Energy subsidiary.

Ed Bastian, president of Delta, said that the airline hopes to supply up to 80% of its domestic jet fuel needs as a result of the purchase, at the Bank of America Merrill Lynch global transportation conference in Boston last month. This would result in about $300 million in annual savings to the airline's fuel bill.

"The refinery is a bold idea," he added.

The purchase has had a mixed reception from the financial community. Moody's Investor Services said that the deal poses "potentially significant operating and financial risks" and deemed it a credit negative in a comment last month. Standard & Poor's and Fitch Ratings each noted that it poses some risks but would not affect Delta's credit rating in the near term.

The deal benefits from $30 million in job creation and infrastructure development financing from the Commonwealth of Pennsylvania.

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Seems like a mugs game. The airlines does well...the refinery does poorly. The refinery does well and the airline does horribly....

Exxon Mobil Corp. (XOM), the world's biggest energy company by market cap, reported its 4Q profit at a five-year high boosted by its refining arm from growing supplies of cheap U.S. oil. However, Delta Airlines (DAL) can't tell a similar success story with its newly acquired refinery.

Delta paid $150 million for a Phillips 66 refinery in Trainer PA last May aiming to save $300 million a year in future fuel costs. At the time, many analysts saw this acquisition as a smart fuel hedge move by Delta. However, as I previously discussed, the actual implementation of this potential fuel cost savings could be quite problematic.

http://seekingalpha.com/article/1152261-delta-airlines-oil-refinery-the-math-doesn-t-work?source=yahoo

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