Is Delta Airways Mad?

abarrelfullabarrelfull wrote on 07 May 2012 12:58
Tags: refinery usa

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Last week saw the release of the most surprising bit of news from the refining sector for many a year.

Delta Air Lines (NYSE: DAL) wholly-owned subsidiary, Monroe Energy LLC, has reached agreement with Phillips 66 (NYSE: PSX-WI) to acquire the Trainer Refinery complex south of Philadelphia.

Their reasons:

"This modest investment, the equivalent of the list price of a new widebody aircraft, will allow Delta to reduce its fuel expense by $300 million annually

That seems like an awful lot of savings, which raises the question. If Phillips 66 was making $300 million per year from jet fuel why did it close the refinery down?

The biggest problem that the refinery has is its source of light sweet crude, processing crudes from countries such as Angola, Congo (Brazzaville) and Nigeria. At a time when rivals had access to cheap WTI priced crude oil, Trainer Refinery and its neighbours the Philadelphia Refinery and Marcus Hook Refinery were processing crudes that in many cases are sold at a premium to Brent Crude.

Now the only feasible strategy for the refinery is to completely change its source of raw materials. The growing volumes from the Bakken Oil Field could make a huge difference if they can find their way east.

My personal view is that Delta bought the refinery not because it thought that it would be better at running it that Phillips 66, but rather that if it closed the extra cost of Jet Fuel in the North East would outweigh any losses the refinery might make. At least this way there is a potential upside.

Note that of the three Pennsylvania refineries that were slated for closure, only Trainer has a Hydrocracker, essential for a decent Jet Fuel yield.

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