DL looking at buying an oil refinery?

[signals]

Some refineries do decrease production when prices go down, but that doesn't help with the fixed costs of ownership and EPA compliance.

Again, it's an interesting gamble, but not one without risks.

You really can't see it. We don't have that many refineries. If they slow or stop production, prices go up!

For an airline that relies on good old fashion oil, this is a guaranteed investment that will not only pay for itself, but generate a profit.

Hint: just follow oil stocks for awhile. The gamble is on a sure thing.

Just sayin'

 

[signals]

Richard Branson thought so too about 5-7 years ago - he was talking about buying a refinery. Then the idea faded away. Now he's talking about biofuel production...

Jim

Branson is a nut. A brilliant nut, but still a nut. Warren Buffet isn't always right, 😀 ...and I have my doubt about greener-wiener solutions.

Remember, Jim, Branson wants to have Mars space travel by 2020 or thereabouts 🙄
Mars Mission

 

[BoeingBoy]

Branson is a nut. A brilliant nut, but still a nut. Warren Buffet isn't always right, 😀 ...

Yet both have been extremely successful....reason to watch what they do and maybe learn a thing or two, or dismiss them as not being as smart as the average airline CEO...

Jim

 

[signals]

Yet both have been extremely successful....reason to watch what they do and maybe learn a thing or two, or dismiss them as not being as smart as the average airline CEO...

Jim

See ya on Mars B)

 

[BoeingBoy]

Hint: just follow oil stocks for awhile. The gamble is on a sure thing.

Just sayin'

And one those companies is selling this refinery (or trying to). Do you reckon you know the oil business better than they do??? Do you reckon that Anderson knows the oil business better than they do???

Jim

 

[xUT]

Since Delta is in the travel industry, they should focus on hotels, cruises and travel related 'spin offs'.
It worked pretty well (NOT) for United/Allegis.
These corporate spin offs suck the life blood from core corporation (Delta Airlines) DAL "Corp" is the holding company of Delta Airlines. Same as the rest of airlines.
The rich get richer and the poor get poorer... B)

 

[WorldTraveler]

Jim,
just look at the DOT stats for fuel usage by US airlines and the capaciyt of this refinery - which is published.
It isn't terribly unreasonable to think one refinery could produce 5% of the jet fuel used by US airlines; remember that foreign airlines come to the US and buy fuel here...so the amount is probably pretty close to the total amount of civilian jet fuel used in the US.
I have no idea how much jet fuel the military uses - but they clearly buy some of it from the same refineries that sell to commercial aviation.
Given that DL has about 20% of the capacity among US airlines, this refinery would at best provide a minority of the fuel even DL uses.
.
It is an interesting concept but the refinery is still a small part of the total production of US jet fuel - and for now represents no capacity since it is not operating... and that may be part of what makes the deal attractive to DL - a mothballed plant that hasn't sold but has the potential to increase jet fuel supplies.

Obviously C-P wanted out of this refinery for very good reasons to them... it doesn't the reasons are the same for someone else.
.
DL has made no statement about its interest in this refinery- it was leaked information from a petroleum industry source. It may or may not come to fruition and the negotiations and DL's analysis are undoubtedly going on right now.
DL is undoubtedly consulting refinery experts and consultants to help decide the viability of the project since this is clearly not in DL's core area of competence. Any company that embarked on an acquisition of this nature outside of their core area would probably face stockholder lawsuits if something goes wrong in the future and they can't demonstrate they either had inhouse experts or hired advisers during the evaluation process.
Even if DL buys the refinery, it is very likely they will contract for someone to run it - perhaps C-P, esp. since C-P said that refinery worked in tandem w/ the other refinery they are keeping.
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None of us will ever be able to judge whether this will be a good idea - and it may well be that DL will never provide enough information even IF it owns the refinery to know if it has worked out well.
.
This whole topic is an interesting development and it will be worth watching.....
.
Branson may be good at marketing but he has made some decisions that other airline execs would not have made... and let's not forget that he was apparently open to selling part of VS - not sure if that is still a possibility. Since VS is largely privately held, it is very hard to know w/ any certainly how well Branson's airline businesses are doing.

 

[signals]

And one those companies is selling this refinery (or trying to). Do you reckon you know the oil business better than they do??? Do you reckon that Anderson knows the oil business better than they do???

Jim

I actually don't know anything. But Delta is more "solid" than other airlines pretend to be, from my viewpoint.

B6 claims that Virgin, therefore Branson, is copying them. Are they wrong?

 

[WorldTraveler]

Jim,
here is a comment about the capacity of the Trainer refinery.

"In some respects Trainer would be a valuable asset. It is configured to produce a much higher yield of jet fuel than other plants, and accounts for a third of the total jet-kerosene capacity on the East Coast, according to government data. Delta is the largest international carrier at nearby JFK airport in New York, and jet fuel is nearly a third of an airline's costs."

and

"DAL is the world's largest commercial buyer of jet fuel, crack spreads are hard to hedge, and even if DAL can obtain a consistent $0.05/gal cost advantage over the long run, it's worth the risk," said Hunter Keay, an airline analyst with Wolfe Trahan.

"Trainer has the capacity to produce over 23,300 bpd of jet kero fuel, nearly a third of the east coast's total capacity of 73,300 bpd, according to data from Energy Information Administration, the information arm of the Department of Energy."

http://www.reuters.com/article/2012/04/04/us-delta-refinery-idUSBRE8331E420120404?feedType=RSS&feedName=innovationNews&rpc=43

 

[chris perry]

I thought Crandal tried to buy a oil company or refinery and it was shot down by the government?

 

[BoeingBoy]

It isn't terribly unreasonable to think one refinery could produce 5% of the jet fuel used by US airlines; remember that foreign airlines come to the US and buy fuel here...so the amount is probably pretty close to the total amount of civilian jet fuel used in the US.
I have no idea how much jet fuel the military uses - but they clearly buy some of it from the same refineries that sell to commercial aviation.

It isn't too hard to understand that all refineries produce jet fuel, some slightly more than others and most with slight changes seasonally. And the U.S. still imports jet fuel - the U.S. refineries don't produce enough to meet the demand. The trainer refinery doesn't have close to 5% of the refining capacity in this country so can't produce 5% of the jet fuel produced in the U.S., never mind the imported jet fuel.

U.S. refineries produce 1,314,000 bbls of commercial jet fuel per week currently, or 187,700 bbls per day. That requires refining 7.9 million bbls per day of crude. Trainer has capacity to refine about 125,000 bbls/day of crude, or about 1.2% of that needed to produce all U.S. commercial jet fuel.

BTW, the EIA is a lot better source for information pertaining to crude production and refining since their job is to do the collection and analysis of energy information for the U.S. About all the DOT (BTS) does is publish the fuel consumption and price data submitted by the airlines. They do nothing in the area of production, just airline consumption.

Given that DL has about 20% of the capacity among US airlines, this refinery would at best provide a minority of the fuel even DL uses.

Now that is something I can agree with, especially since there isn't a direct relationship between an airline's capacity share and it's share of jet fuel consumption.

It is an interesting concept but the refinery is still a small part of the total production of US jet fuel - and for now represents no capacity since it is not operating... and that may be part of what makes the deal attractive to DL - a mothballed plant that hasn't sold but has the potential to increase jet fuel supplies.

Maybe so, but the fact that a company that is actually in the oil industry from crude to refined product and sales closed Trainer and wants to sell it should give one pause. If Conoco/Phillips doesn't think it's worth keeping Trainer in operation, what evidence is there that DL could be more successful with it? As you admitted, DL wouldn't be using the production from Trainer but rather selling the products on the world market where Trainer's capacity is but a drop in the bucket, so it's affect on jet fuel prices would be obscured by rounding. It seems to me that DL would be better off doing what it has some experience with - hedging fuel - and leave the refineries to those who know that business.

Jim

 

[Kev3188]

Kev, this is actually job security.

That concept doesn't exist at the Widget...

 

[WorldTraveler]

Jim,
There were several sources cited showing that the Trainer refinery is designed to produce a higher percentage of jet fuel than others; no one anywhere in this thread has ever doubted that it is possible to exclusively produce jet fuel but there are some refineries that are optimized to produce more of one product over another.
.
There are also several citations that the Trainer refinery has the capacity to be a major source of jet fuel in the US - up to one third othe east coast capacity. That type of capacity is not insignificant.
And again, just because one company finds the refinery unusable for their needs doesn't mean it isn't usable for another.... why would there exist a secondary market for any product based on your logic?
.
It really doesn't matter whether DL burns the fuel it produces or not. Jet fuel is a commodity; if they produce some jet fuel, they are capable of selling what they produce at whatever economics they generate and then buying at locations where they need it. The US has an extensive network of pipelines to move petroleum products where they need to be - supplemented by even more trucks. DL doesn't need to worry about the transportation aspect of jet fuel - others will continue to do that. DL, IF this transaction goes through, will reap whatever sayings they gain from being in the refining business.
.
I have no idea what your motives are for immediately coming to the conclusion that DL buying a refinery is impossible to pull off - no one else here seems quite as confident they have it all figured out.
The reality is that a $30B year company that is one of the most successful in its segment is considering an acquisition that all of us can agree is outside of their core area of business. The idea is intriguing at the least.
But don't you think that as an outsider you, just like the rest of us, don't and won't have the detailed information to know if this is a valid move for DL or not? And as such any person, outside of the board and the area at DL responsible for the transaction, really has no choice but to watch it play out and try to figure out whether a truly out of the box concept like this actually can work.
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Maybe we'll hear about this on DL's earnings call in a couple weeks... but until then it is still just a leaked rumor that may or may not turn into reality.

 

[johnny kat]

Brilliant!

 

[eolesen]

Apparently DL has been in discussions on this for almost a year.

To Chris's question, AA created AA Development Corporation and AA Energy Corporation in 1977, right after the oil embargo. These subsidiaries (merged in 1984 to create AMR Energy Corporation) participated in the exploration and development of oil and natural gas resources. The subsidiary was sold in 1986.

If you look at the graph, there was an uptick in 1977, and it fell off in 1986 (not to rise again until 2001).

Again, I don't know if this is a good move or not.

Certainly, it would have been tried before, and in 1986, Crandall had a lot of smart guys in the room. They saw fit to get out of the business.

As a short term move, this might make sense, but I can't say it is the smartest capital investment. They'd probably be better off taking the money spent on a refinery and taking an ownership stake in an oil company...

Just about everyone else in the airline industry who has made a move at controlling another portion of the supply chain (catering, training, hotels, software) has gotten out.

Even with regional feed, most of the majors have either totally divested or seriously reduced the number of feeders they have control over (AA and AS being the outliers until this week).

Jetblue and Allegiant are also exceptions, in that B6 still own LiveTV and G4 owns its own IT company/division/subsidiary, but we're talking about much smaller investments there which could easily be spun off or even wound down with little impact on earnings.