DL looking at buying an oil refinery?

[WorldTraveler]

Interestingly, not a single Wall Street analyst thought it was worth asking about the refinery on yesterday's earnings call.

A reporter asked, and was shot down with "we're going to consistently not comment on industry rumor and speculation."

I haven't listened to the conference calls for companies that reported this week but it isn't suprising nothing was mentioned since no deal has been announced - and it is pretty well accepted that cmopanies don't report on speculation.
.
Now that all of the carriers have reported, it is worth noting that DL reported actual paid fuel prices at least a couple cents better than other carriers. Since there are multiple ways of reporting any statistic including fuel, carriers can come up w/ any number of ways of reporting fuel prices. Not every carrier reports on a comparable basis.
DL reported a fuel price as much as 14 cents lower than the rest of the industry if open hedges are includes - or $3.11/gal. The industry average was about $3.25/gal - and with some hedging AA came very close and US was only a couple cents higher. UA was about 7 cents above the average and WN was 20 cents higher including 12 cents/gal of bad hedges. WN does not expect any significant benefit from fuel hedge gains.
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So, it is possible that if DL can continue to hedge better than the industry, it will decide the refinery deal is not necessary - or perhaps not.

 

[BoeingBoy]

Since there are multiple ways of reporting any statistic including fuel, carriers can come up w/ any number of ways of reporting fuel prices. Not every carrier reports on a comparable basis.

In theory, hedges that settled during the quarter should be included when calculating fuel cost, and open hedges (unsettle in future quarters) should be a non-operating item (mark to market gain/expense). That's because only hedges that settled during the reported quarter actually produced a profit/loss - mark to market is just bookkeeping or changing the value of assets as the market value changes. A carrier that reports differently is presumably using bookkeeping entries to make the price it paid for fuel look cheaper in one quarter but risks exaggerating an increase in fuel costs in later quarters.

Jim

 

[WorldTraveler]

as you know, accounting for derivatives has come under considerable scrutiny. Wall Street wants to know the risk that is on company's books at the earliest possible moment.
The accounting method used is probably secondary to the fact that DL is obtaining significant financial benefits from hedging activity - apparently due to the guy they brought in that had experience in both the investment banking and oil industry.
my guess is that DL doesn't want to announce a deal so close to earnings since there is so much negative opinion going into it... if the deal makes sense, they will move forward but want their earnings performance limited from it.

 

[WorldTraveler]

...loves me, loves me not, loves me, loves me not....


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


http://finance.yahoo.com/news/analysis-deltas-refinery-bid-looks-040737622.html

 

[FWAAA]

Now that all of the carriers have reported, it is worth noting that DL reported actual paid fuel prices at least a couple cents better than other carriers. Since there are multiple ways of reporting any statistic including fuel, carriers can come up w/ any number of ways of reporting fuel prices. Not every carrier reports on a comparable basis.

On a comparable basis, however, AA paid four cents less per gallon than DL.

DL reported a fuel price as much as 14 cents lower than the rest of the industry if open hedges are includes - or $3.11/gal. The industry average was about $3.25/gal - and with some hedging AA came very close and US was only a couple cents higher. UA was about 7 cents above the average and WN was 20 cents higher including 12 cents/gal of bad hedges. WN does not expect any significant benefit from fuel hedge gains.

AA does not disclose its "mark to market" gains on open hedges, but does report a quarterly price including settled hedges. In the first quarter, AA paid $3.24/gal on a consolidated basis, including hedging gains (settled) of $29 million. DL paid $3.28/gal (again on a consolidated basis), including settled hedging gains of $45 million.

So, it is possible that if DL can continue to hedge better than the industry, it will decide the refinery deal is not necessary - or perhaps not.

We don't know what AA's mark to market gains on open hedges were (if any), but we do know that AA led the way on fuel price including settled gains.

 

[WorldTraveler]

AA did do a good job on fuel - which goes to show that even w/ limited hedges (compared to a year ago) they didn't do badly... but US' prices weren't that bad either w/o hedging....

both of which perhaps goes to show that there really aren't as many advantages to hedging as one might think which is also why DL decided there was more value to be had in looking for permanent changes to the price of fuel than just via the financial markets.
DL did register pretty decent gains compared to other carriers in the 4th quarter of 2011 so there is clearly an ebb and flow in the process.

If DL took the benefit of its hedges for the 2nd quarter on its books for the 1st quarter, then the gain they will receive might be less.
Forbes notes DL's advantage in the 1st quarter via fuel hedges.
http://www.forbes.com/sites/steveschaefer/2012/04/30/delta-pulls-the-trigger-on-purchase-of-philly-refinery-from-phillips-66/?partner=yahoofeed

 

[FWAAA]

AA did do a good job on fuel - which goes to show that even w/ limited hedges (compared to a year ago) they didn't do badly... but US' prices weren't that bad either w/o hedging....

both of which perhaps goes to show that there really aren't as many advantages to hedging as one might think which is also why DL decided there was more value to be had in looking for permanent changes to the price of fuel than just via the financial markets.

I'm going to focus on the difference between AA and US for the time being. AA's hedging gains of $29 million, if achievable on an annualized basis, would buy about three new 738s (following Delta's lead on expressing savings or investment in terms of how many planes it would buy). Doug Parker at US has said that hedging itself is expensive and difficult, and has elected to go uncovered as to fuel prices. In the first quarter, US paid $3.27/gal for fuel without any hedging, so AA saved three cents per gallon, including the costs of hedging. Not a tremendous difference, but the fuel hedging personnel at AA certainly paid for themselves.

AA's fuel price (including hedging gains and losses) has been less than US' fuel price in each year since the US-HP merger except for one (2010). Even in bankruptcy, with limited ability to hedge, AA managed to save $29 million due to its hedging activities - probably about 3/4 of a new 738.

At $3.28, DL paid a penny more than US on a consolidated basis, but DL did save $45 million due to settled hedges. That tells me that DL, with its much more extensive world-wide network (compared to US) is probably buying fuel in some expensive, out of the way places (particularly, Africa). To a lesser extent, same story with AA, which saved just over four cents per gallon due to hedging but paid just three cents less than unhedged US. Obviously, AA is buying fuel at some more expensive pumps than US, which is to be expected with a more extensive international network.

 

[BoeingBoy]

Obviously, AA is buying fuel at some more expensive pumps than US, which is to be expected with a more extensive international network.

Latin/Central America ($3.340/gal) and then Europe/CIS ($3.238/gal) are currently the two highest priced regions in the world for jet fuel (Friday, 4-20-2012), followed by N. America ($3.210/gal). All are spot prices per Platts, so retail prices should be higher. US did pretty well unhedged because jet fuel prices were down YoY for most of the quarter.

Jim

 

[Airlinelifer]

...loves me, loves me not, loves me, loves me not....


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


http://finance.yahoo.com/news/analysis-deltas-refinery-bid-looks-040737622.html

Done deal..........
http://finance.yahoo.com/news/delta-buys-refinery-bid-cut-203819752.html