DL looking at buying an oil refinery?

[FWAAA]

except that DL would not retain those benefits if it were a producer.... the reason why the deal has the potential to make sense is because DL is a producer and also a consumer - and precisely because refineries produce products which DL doesn't need. Oil producers don't care about jet fuel.. they care about profits. If DL can get jet fuel at producer costs and swap gasoline etc which it doesn't need with parties that are focused on making money on gasoline while DL gets lower cost jet fuel.
IOW, all the reasons why people argued it didn't make sense are exactly the reasons it does.

Now I'm confused. You're saying that DL could potentially save half a billion dollars a year on its jet fuel bill if it invests a couple hundred million in a refinery and upgrades, yet those same cost advantages wouldn't be available if it didn't operate an airline? Couldn't DL simply sell the product to other airlines and pocket the same $500 million? In my world, cheap commodities can be used or sold.

 

[WorldTraveler]

your assumption remains that DL would be a pure producer just like any other producer... in this scenario it would be both consumer and producer - and the existing producers and counterparties to the deal MAY (again I don't know but it can't be ruled out) have an interest in allowing DL into "their" space rather than allowing DL to subvert their system which could come via further legislative efforts or buy acquiring talent and resources that could minimize the other parties' ability to continue to win at DL's expense.
.
It is no more unreasonable to think that DL COULD benefit as a consumer by also playing in the producer role in the same way that banks and financial institutions benefit by also being energy producers alongside their commodities trading businesses.
.
Again, we don't have the details and no one can make an informed judgment without those details - but I have said all along there is more to this potential deal than has been revealed in the few tidbits that have been leaked.

 

[UPNAWAY]

This article says it is a very bad idea.

Why Buying A Refinery Could Be A Disaster For Delta Air Lines (Even With JPMorgan's Help)

Delta Air Lines is eyeing ways to get a handle on rising jet fuel costs, and reportedly talking to ConocoPhillips about buying its refinery in Trainer, Penn. CNBC’s Kate Kelly reported Wednesday that JPMorgan Chase is now getting involved, and talking about coming on as a financing partner that would pay for the crude oil that would go into the refinery, then selling the refined products to Delta (at around cost) and to the broader market. Edward Hirs, a professor of energy economics at the University of Houston, says he can think of one reason why Delta would try to get into the refining business: “because they’re stupid.” “If Delta is concerned about the cost of fuel they can hedge without exposure to the risks of owning a refinery,” Hirs says, which include everything from explosion and spills to labor strife and regulatory issues with states or the federal government.

Source: Forbes, April 11

 

[eolesen]

Oh, come on. What would a professor of energy economics from Houston know about the oil business?

 

[signals]

Both airline and energy analysts are saying it's a bad idea. Still there are various speculations as to what Delta really hopes to accomplish. I don't think the airline is acting on a whim and believe this is a well thought out plan.

In the end we will know Delta's means and determine success or failure.

In the meantime, is this a done deal yet or just leaked speculation?

 

[WorldTraveler]

Several sources say a deal is imminent and could be announced this week involving DL, JP Morgan, and Conoco-Phillips. DL will report earnings next Wednesday so there will be plenty of opportunity for them to explain why they are doing what they are doing.

Sounds like JP Morgan would finance much of the operation and be responsible for trading unwanted products (non-jet fuel) while DL Conoco would supply additional jet fuel to DL.

http://www.reuters.com/article/2012/04/17/refinery-trainer-delta-idUSL2E8FH5E920120417?feedType=RSS&feedName=marketsNews&rpc=43

http://www.cnbc.com/id/47065005

 

[BoeingBoy]

The unnamed sources are making this deal sound stranger and stranger...

JPM buys the crude - the highest priced crude at that. DL gets the jet fuel plus some amount of the gasoline produced while JPM gets as little as 1/2 of the refined output of the refinery. So JPM has to pay for 100% of the crude and make money selling as little as 1/2 the production from that crude? What's in it for JPM?

Jim

 

[WorldTraveler]

99% of the intrigue of this deal is because it defies all logic about why it should work... and that is what makes it interesting - because clearly everyone involved has pretty good reason to think their needs are going to be met.
.
When the facts are known and a little bit of history shows whether it really was a good deal or not, alot of people might be led to ask "why didn't I think of that".... or conversely "why did they not realize that..." ... and the intrigue comes from figuring out who missed seeing what....

 

[topDawg]

The unnamed sources are making this deal sound stranger and stranger...

JPM buys the crude - the highest priced crude at that. DL gets the jet fuel plus some amount of the gasoline produced while JPM gets as little as 1/2 of the refined output of the refinery. So JPM has to pay for 100% of the crude and make money selling as little as 1/2 the production from that crude? What's in it for JPM?

Jim

FWIW Delta would by the Jet A and Gas that its trades from JPM at cost. Still doesn't seem like JPM will make much if anything.

 

[eolesen]

Maybe JPM is getting their air travel at cost?... Barter isn't a new concept.

 

[BoeingBoy]

Maybe JPM is getting their air travel at cost?... Barter isn't a new concept.

Maybe. I hope they travel a lot if that's the case - a tanker loaded with high priced crude ain't cheap...

Jim

 

[WorldTraveler]

Maybe JPM is getting their air travel at cost?... Barter isn't a new concept.

maybe the same thing is part of the Conoco deal....

maybe we will hear tomorrow.

 

[FWAAA]

Has DL said anything about the refinery rumours so far today?

Here's another article written by a naysayer:

Delta doesn’t need its own refinery to obtain jet fuel, which is traded in a thick worldwide market, any more than it needs to own a peanut farm to supply in-air snacks.

Yes, it's a smart-ass comment, but it made me spit out my coffee.

On a more serious note:

Delta simply seems to be falling for the great fallacy of vertical integration: the belief that the inputs you get from an in-house supplier are cheaper than those you buy in the open market. There’s no markup. You’ve cut out the middle man!

But this story misses the real cost of those inputs.

Consider a thought experiment. Suppose Delta owns the refinery and the market price of jet fuel goes so high that buying fuel on the open market would make many of Delta’s flights unprofitable. Should Delta managers sigh with relief and fly those otherwise unprofitable flights, using fuel from their own refinery? Or should they take that fuel, sell it at those high market prices, and cancel the unprofitable flights?

The real cost of the fuel is not whatever expenses the company incurs to produce it. The real cost is what the company is giving up to use the fuel itself: the price it would command in the market (markup included). If managers sacrifice refinery profits to fuel their flights, those costs are just as real as out-of-pocket expenditures.

http://www.bloomberg.com/news/2012-04-19/delta-s-oil-refinery-plan-flies-against-economic-sense.html

To be fair, the same conundrum would present itself if DL bought some proven oil reserves as a hedge. If oil spikes in price, its oil reserves are winners. But should it then fly the unprofitable flights by spending its oil reserve winnings?

 

[topDawg]

Has DL said anything about the refinery rumours so far today?

Here's another article written by a naysayer:


Yes, it's a smart-ass comment, but it made me spit out my coffee.

On a more serious note:


http://www.bloomberg.com/news/2012-04-19/delta-s-oil-refinery-plan-flies-against-economic-sense.html

To be fair, the same conundrum would present itself if DL bought some proven oil reserves as a hedge. If oil spikes in price, its oil reserves are winners. But should it then fly the unprofitable flights by spending its oil reserve winnings?

"Delta doesn't comment on market rumors."

Only seem to get that when something is in play. If its a dead no then they normally say so.
It was the first question asked though. <_<

 

[eolesen]

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."