DL looking at buying an oil refinery?

[WorldTraveler]

This CNBC video http://video.cnbc.com/gallery/?video=3000082469&__source=yahoo|headline|quote|video|&par=yahoo says that the DL board is so far interested in the endeavor, that the price would probably be in the $100M or so neighborhood (less than a new widebody aircraft), and the refinery would require a 4 year overhaul that would bring it up to environmental standards at a cost of another $90-100M.
Not exactly insurmountable costs for a company that is planning to spend more than $10 billion on fuel in one year.... note that DL's own hedging program has produced 10-15 cent savings per gallon on jet fuel recently... which translates into a couple hundred million dollars.
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The video also says that sources say more should be known in the near future - but it is certain that DL is surrounding itself with advisers in a deal that even those outside the industry find very fascinating.

 

[BoeingBoy]

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.

I've not said that the amount of jet fuel produced from each barrel of crude can't be tweaked - I've said it can. But major changes - trying to produce 20-30% jet fuel from each barrel of crude is out.

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.

I'm just going by what the EIA says - that Trainer has only a small portion of the refining capacity in PADD 1, which itself is only a small part of total U.S. refining capacity. Heck, if Trainer could produce nothing but jet fuel (which it can't) it would still not be "a major source of jet fuel in the US."

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.

I've never said or intimated that. For anything that wouldn't have regulatory impediments DL can certainly buy what it wants. All I've said is that I can't understand why DL would want to buy Trainer. Refineries are not high margin operations, DL has no experience with operating a refinerary and if it has to pay someone else to run it there goes that small margin, and why oh why is it such a great deal if a company whose business is refining doesn't want Trainer any longer and has already shut it down.

I'll leave you with this:

Article

Jim

 

[WorldTraveler]

There are obviously people who have strong opinions about the potential deal, including those that have access to far more information about it than you or I.
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But there are some clear logical biases in the article you cite, Jim.
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First is that jet fuel prices can be controlled via hedges; they cannot, as you well know because there are virtually no hedges on jet fuel even though there are on a number of other petroleum products. Thus, the idea that DL could just improve its hedges is not realistic.
DL has recently just changed the way it hedges - they still have not fully disclosed what they are doing and seem rather tight lipped about the whole process, but there are limits to how much hedging exposure a company can take... and airlines have come close to reaching those limits, even though the amount they are actually saving is fairly small.
Second is that DL's hedging program right now is not successful. We'll see based on 1st quarter results but based on guidance that carriers have reported and the little bit of public information that is released directly detailing fuel price paid (DL and UA both report it on a monthly basis now although UA has not reported for March so far) but DL has had a fuel price advantage due to its hedging program.
Third is the assumption that products other than jet fuel are unwanted.... DL's intent is clearly to control its jet fuel prices, but who is to say that there isn't money to be made in other petroleum products?
Fourth is that C-P mothballed the refinery because it couldn't make money.... in fact, the refinery is due for the equivalent of an overhaul. Oil companies like airlines don't necessarily perform the heavy maintenance if they can't find justification for keeping the refinery operating, just as airlines schedule their overhauls based on the necessity of each particular aircraft.
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There are some clear structural issues being cited as to the reason that the jet fuel crack spread has increased, some of which is related to the source of crude and the capacity to produce jet fuel.
Buying the whole process via an oil company might sound like a reasonable idea but DL and its board apparently believe this is the possibility to control part of the process within the resources DL does have.
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I don't know whether this makes sense for DL or not - but I do give them credit for considering a solution to spiraling fuel prices that is clearly out of the box based on the industry. Even if another airline might have considered such a move in the past, it doesn't mean the answer today for DL would be the same - anymore than that the economics of RJs were right at one time but are not now while winglets didn't make near as much sense a few years ago but make a whole lot more sense today.
I would not be the least bit surprised to find that DL has retained a number of petroleum experts as advisers - perhaps employees - and they have helped overhaul the hedging program and perhaps are providing insight into the potential for operating a refinery. It is highly doubtful DL is considering this without a great deal of advise and counsel.
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The world moves on... you either confront the challenges and try to make things work for you or you are subject to everything that happens around you.
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As one wise person here notes, "Obstacles make you clever"... at least they have the potential to for some people in some circumstances. The wise figure out how to improve on their odds that overcoming obstacles can be repeated.

 

[FWAAA]

Anyone else notice that a fair number of refineries seem to be closing recently (and over the past few years)?

Anyway, true genius would have been investing in oil suppliers (that owned oil reserves) in, say, 1986 or in 1997-99, two periods when oil prices collapsed. A significant investment in ExxonMobil or TexacoChevron during the lean years above would have paid off handsomely.

Buying a refinery? Buying a refinery that a major oil company has shuttered? A refinery that doesn't come with any oil reserves? To make that investment a success, DL would have to run the refinery more efficiently than did its major oil company former owner, and I don't find that to be a plausible scenario. It would be like a family buying a bodega in an attempt to trim its grocery expenses, when both mom and dad already have full-time jobs, not in the grocery business.

Airlines don't have a fuel price problem because they don't own refineries. Airlines have a fuel price problem because the price of crude oil has ballooned from fairly low to north of $100/bbl, and with more and more people around the world beginning to use gasoline for transportation, the price of oil is likely to increase long-term. Purchasing and operating a refinery that depends on buying oil from others doesn't look like the way to combat that fuel price problem.

To be fair, DL has had some resounding successes with ancillary investments, like the billion dollar gain it recognised on its Priceline stock during the last decade. The Trainer refinery, however, doesn't look like the same favorable opportunity.

 

[BoeingBoy]

But there are some clear logical biases in the article you cite, Jim.

In other words, you don't agree with it...

First is that jet fuel prices can be controlled via hedges; they cannot, as you well know because there are virtually no hedges on jet fuel even though there are on a number of other petroleum products. Thus, the idea that DL could just improve its hedges is not realistic.

While jet fuel isn't hedged directly (although there is a small market for jet fuel futures/options developing), everybody that pays any attention to hedging knows how the process works but maybe you don't. Petroleum products whose price changes have a high correlation to the changes in price of jet fuel are used as proxies for jet fuel. Then profits/loses on those hedges are applied to the price paid for jet fuel and that gives a net post-hedge jet fuel price. Make money on the hedges and lower the effective price of jet fuel, lose money on the hedges and increase the effective price of jet fuel. The concept is pretty easy to grasp although in the real world it's impossible to be 100% successful since the cost of the raw commodity - crude - or the desired finished product - jet fuel - is not affected by only supply and demand.

A refinery also entails price risk so it's no different from hedging fuel in that respect. Especially with a one refinery operation such as DL is supposedly considering, the risk of fluctuating crude prices, the changing cost of getting the crude to the refinery and the changing market prices for the refined products is merely replacing the risk of hedging against fuel price fluctuations, not eliminating the risk.

Second is that DL's hedging program right now is not successful. <snip> but DL has had a fuel price advantage due to its hedging program.

If success is measured by effectively paying a lower price for fuel, no hedging program is 100% successful. Hedging is like gambling in one respect - be right more than wrong and you make money (and reduce the effective cost of fuel).

Third is the assumption that products other than jet fuel are unwanted.... DL's intent is clearly to control its jet fuel prices, but who is to say that there isn't money to be made in other petroleum products?

That's not my assumption. Certainly DL uses petroleum products other than jet fuel - gas or diesel for ground equipment, lubricants, etc - but far less of those other products than a refinery would produce. Plus, some of those other products require further steps to produce and thus would have to be purchased anyway. Since most of the output of a refinery is not jet fuel, the other products would of course go on the market. In fact, we've both agreed that even the jet fuel produced would at least mostly go into the world market.

Fourth is that C-P mothballed the refinery because it couldn't make money.... in fact, the refinery is due for the equivalent of an overhaul. Oil companies like airlines don't necessarily perform the heavy maintenance if they can't find justification for keeping the refinery operating, just as airlines schedule their overhauls based on the necessity of each particular aircraft.

If Trainer was so profitable it would have the required maintenance done. The fact that Conoco/Phillips doesn't think it's worth the investment speaks volumes, as does the fact that they've been unable to sell it to anyone else, like refinery operators or integrated petroleum companies. Using your airline and aircraft heavy maintenance example, carriers routinely incur the cost to overhaul planes that produce a return but often don't if the plane has outlived it's financial usefulness due to age, inefficiency, whatever. Just like those planes that AA parked in storage. So again, the fact that Conoco/Phillips doesn't consider Trainer a candidate for "overhaul" speaks volumes...

I don't know whether this makes sense for DL or not - but I do give them credit for considering a solution to spiraling fuel prices that is clearly out of the box based on the industry.

Nothing wrong with looking at it, but if DL thinks that owning a refinery will immunize it from fuel price fluctuations (as you seem to believe) they're making a big miscalculation.

Jim

 

[signals]

Anyone else notice that a fair number of refineries seem to be closing recently (and over the past few years)?

Anyway, true genius would have been investing in oil suppliers (that owned oil reserves) in, say, 1986 or in 1997-99, two periods when oil prices collapsed. A significant investment in ExxonMobil or TexacoChevron during the lean years above would have paid off handsomely.

Buying a refinery? Buying a refinery that a major oil company has shuttered? A refinery that doesn't come with any oil reserves? To make that investment a success, DL would have to run the refinery more efficiently than did its major oil company former owner, and I don't find that to be a plausible scenario. It would be like a family buying a bodega in an attempt to trim its grocery expenses, when both mom and dad already have full-time jobs, not in the grocery business.

Airlines don't have a fuel price problem because they don't own refineries. Airlines have a fuel price problem because the price of crude oil has ballooned from fairly low to north of $100/bbl, and with more and more people around the world beginning to use gasoline for transportation, the price of oil is likely to increase long-term. Purchasing and operating a refinery that depends on buying oil from others doesn't look like the way to combat that fuel price problem.

To be fair, DL has had some resounding successes with ancillary investments, like the billion dollar gain it recognised on its Priceline stock during the last decade. The Trainer refinery, however, doesn't look like the same favorable opportunity.

You can't make oil into fuel without a refinery. If refineries are closing, that means that the few that remain can basically name their price...or limit the supply to the increased demand. Might be illegal or immortal, but it happens.

Perhaps we should wait and see how the end turns out. If Delta made a bad investment, it will pay dearly. Then again, if Delta made the right move, lets learn the means for the success. I don't think Delta, or anyone, is in business to lose money.

 

[eolesen]

If refineries are closing, that means that the few that remain can basically name their price...or limit the supply to the increased demand. Might be illegal or immortal, but it happens.

Guess you could say the same about the airlines, eh?

Someone usually steps up to fill the void, and it probably would be the case now if the current administration and EPA weren't so openly hostile towards anything related to fossil fuels.

 

[WorldTraveler]

no, Jim,
I've CONSISTENTLY said that I am intrigued by the idea - but I have nowhere near enough data - and never will - to know if this is a good investment or not.
You and a whole lot of people who have no more information somehow think you can come to the conclusion that this would be a bad investment for DL. That tells me volumes about you, Jim. Volumes.
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What has been completely lacking in all of these posts is any reasonable suggestion as to what DL or any other airline should do in the face of a world that is rapidly changing.
Jet fuel increased 30 plus percent last year on top of double digit increase in several recent years.
Some of you apparently would be content to just sit by on the sidelines and remain powerless - while extracting more and more from employees since that is the model you have learned in the airline industry.
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Sadly for you, DL doesn't fit that mold and will do what they believe is in their best interest and has plenty of people helping them determine if this is the right thing to do.... and assuredly one of them is not me.
I have watched DL for over 35 years and I can assure you they have a culture that is all about overcoming the obstacles that they face and figuring out how to win - some in business circles call it "the fire in the belly" - and it is what separates those who succeed from those just along for the ride.
It is probably why Delta, a company that was not part of the original chosen few airlines that formed the backbone of US aviation in its early years and did not receive any of the post war int'l route authorities has managed to grow into the 2nd largest airline in the world and successfully acquired more of its existing network than any other airline in the world.
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I'm not capable of knowing whether this is a good deal for DL or not - and I don't mind admitting it.
I do know that DL has a very strong record of success in an industry that is littered with failure and the few with privileged pasts have lost most of the advantages they gained because they couldn't figure out how to adapt and succeed.
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DL's "fire in the belly" is all about finding ways to adapt and succeed even when its peers cannot.
What they do with the fuel issue will be just one more chapter in that story.

 

[BoeingBoy]

What has been completely lacking in all of these posts is any reasonable suggestion as to what DL or any other airline should do in the face of a world that is rapidly changing.
Jet fuel increased 30 plus percent last year on top of double digit increase in several recent years.
Some of you apparently would be content to just sit by on the sidelines and remain powerless - while extracting more and more from employees since that is the model you have learned in the airline industry.

Your posts seem to be very much in favor of DL acquiring a refinerary. I have yet to notice any indication that you don't think it's a smart move.

DL is doing what it can - it has a fuel hedging program. If it wants to exchange fluctuations in fuel prices for the fluctuations in crude and transportation prices plus take on the costs of operating a refinery, more power to it. The desired end product, jet fuel, will fluctuate in price just as it does now. There are times that one must admit that there are costs of operation that can't be completely controlled, and that goes for any company. Even Walmart can't dictate the price of electricity, but I haven't seen any indication that they're gonna build or buy a power plant. The Trainer refinery is pretty small in the grand scheme of things - putting it's production on the market isn't going to cause a big drop in the prices of it's products. It may be a big fish in the small pond of east coast refining, but it represents a drop in the ocean of U.S. refining and is almost a rounding error in world refining capacity.

Some things appear unlikely to succeed from the get go. Independence Air when it announced that it was going to be a stand-alone carrier using RJ's. Mesa doing the same with it's Hawaiian division and the partnership in China for a stand-alone RJ carrier. Republic acquiring F9 in F9's bankruptcy. US hedging fuel with short term hedges. I'm sure that all those sounded like good ideas to those in charge at the time, but all failed.

Maybe DL will be successful if they acquire Trainer, the exception as it were. One thing is certain, however - either win or lose a ton of money will be spent to answer the question of whether it's a good idea or not. Would that money be better spent modernizing the fleet with more fuel efficient planes faster?

Jim

 

[WorldTraveler]

Your posts seem to be very much in favor of DL acquiring a refinerary. I have yet to notice any indication that you don't think it's a smart move.

DL is doing what it can - it has a fuel hedging program. If it wants to exchange fluctuations in fuel prices for the fluctuations in crude and transportation prices plus take on the costs of operating a refinery, more power to it. The desired end product, jet fuel, will fluctuate in price just as it does now. There are times that one must admit that there are costs of operation that can't be completely controlled, and that goes for any company. Even Walmart can't dictate the price of electricity, but I haven't seen any indication that they're gonna build or buy a power plant. The Trainer refinery is pretty small in the grand scheme of things - putting it's production on the market isn't going to cause a big drop in the prices of it's products. It may be a big fish in the small pond of east coast refining, but it represents a drop in the ocean of U.S. refining and is almost a rounding error in world refining capacity.

Some things appear unlikely to succeed from the get go. Independence Air when it announced that it was going to be a stand-alone carrier using RJ's. Mesa doing the same with it's Hawaiian division and the partnership in China for a stand-alone RJ carrier. Republic acquiring F9 in F9's bankruptcy. US hedging fuel with short term hedges. I'm sure that all those sounded like good ideas to those in charge at the time, but all failed.

Maybe DL will be successful if they acquire Trainer, the exception as it were. One thing is certain, however - either win or lose a ton of money will be spent to answer the question of whether it's a good idea or not. Would that money be better spent modernizing the fleet with more fuel efficient planes faster?

Jim

I've only said about a half dozen times I don't know whether this will be a good decision for DL or not - I have no idea how you could come to the conclusion I think it would be a good idea.
I don't know.. and neither do you.
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You can drag all the examples out you want that you think are parallels, but the fact remains that DL has advisers and a board with a huge fiduciary responsibility to its stockholders who are trying to figure out if this makes sense or not.
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There is no exception, Jim. No US airline that I know of has ever owned an oil refinery - so this would be ground breaking if it happens.
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DL is also fully aware of the alternatives about how it could use its money. They have finance people who know what money costs and have demonstrated a pretty good track record at improving the return on the resources DL has been given to manage.
If they decide to mvoe forward with the oil refinery, they are doing it because they believe it is the best use of their resources and has the greatest potential to improve DL's financial performance.
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For about the 8th time, I have no idea what decision they will make - and I, along with you, do not have the knowledge, training, or information to make that decision or evaluate if they made the right choose regardless of what they do.

 

[signals]

Guess you could say the same about the airlines, eh?

Someone usually steps up to fill the void, and it probably would be the case now if the current administration and EPA weren't so openly hostile towards anything related to fossil fuels.

They could be as hostile as they want, we'll still be using fossil fuels long after they are gone.

Make no mistake, there is more oil in N America than the rest of the world combined. We just can't tap it because of the environmental concern...which is a krock! We could be paying less than a buck a gallon.

Some people say this refinery idea didn't work in the past. Perhaps. But many times what was a bad idea then, becomes a way of life in the future.

 

[southwind]

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

You get a layoff notice or something Kev ?

Noticed even with a union, NW and now AA, the concept of job security doesn't exist either ! :unsure:

 

[Kev3188]

Not yet, but plenty of others have. Are you okay with that?

As for NW, I know it'll be tough, but please educate yourself on what happened during NW's BK, and how having an advocate in court helped preserve benefits, scope, & jobs (including mine, BTW).

 

[southwind]

So.......if you owned a landscape company, had 10 employees, only needed 6 of them to get the job done, you would keep the other 4 and let them sit around playing cards.......correct ?

A simple yes or no will suffice !

 

[BoeingBoy]

This would seem yet one more example of how DL has figured out how get smart despite the obstacles and challenges that face it in the airline industry today.

Does DL potentially gain the opportunity to increase the supply of jet fuel on the market - and potentially reduce marketing and distribution costs with the products "its" refinery produces? Yes

It is also possible that DL's efforts could turn the fuel business into another profit center for DL - and could also help drive down the price of jet fuel for all carriers.
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As for the economics for the current owner vs. for DL, it is very possible that DL's focus on jet fuel with less of a focus on providing financial returns on petroleum products across the board may result in different economics for DL vs. the results an oil company would consider acceptable.

You seemed to think acquiring Trainer is a good idea earlier in this thread...one more example of how DL has figured out how [to] get smart...increase the supply of jet fuel on the market...turn the fuel business into another profit center for DL...may result in different economics for DL...

If nothing else it seems that you're now looking at it more realisticly as opposed to the earlier cheer leading...

Jim