Done Deal -- $120M for Refinery

[WorldTraveler]

There are a number of articles that say that DL is buying the transportation assets associated w/ the refinery. Colonial Pipeline does run from the Gulf to the NE including NYC but I am quite sure it is not for sale.
Trainer has been supplied by crude arriving by ship for quite some time. There may be other pipelines available to bring in crude but that has not been the system that has been used, primarily because Trainer uses imported oil.

Crack spread was the motivation for the deal from DL's perspective. They provide a list of scenarios in their SEC filing in which they note how will benefit regardless of how the crack spread moves.

 

[BoeingBoy]

Jim, Your post...

You obviously know more about pipeline transmission of fluid pretroleum products than I do, so a doff of my hat. As far as "waste", several thousand gallons is a pittance if there's hundreds of thousands of gallens of liquid product on either side of the dividing point - Colonial Pipeline's minimum batch for transmission is 75,000 barrels (3.15 million gallons) but I assume that's at the origin on the Gulf since that would then be drawn off as the flow moved northeast. Presumably Trainer would only be shipping product via Colonial so it would only entail adding the product to the existing flow at the right time. Given that many/most airports have approved fuel contractors that all the carriers at a specific airport use, managing "waste" would be the contractor's or someone other than the end user's problem (although it would go into their overhead and the cost included in the price of the retail product.

Jim

 

[BoeingBoy]

There are a number of articles that say that DL is buying the transportation assets associated w/ the refinery.

I would assume until specified otherwise that those would be the connections that allow ships/barges to unload crude and possibly upload finished product plus any connection to a product transmission pipeline like Colonial.

There may be other pipelines available to bring in crude but that has not been the system that has been used, primarily because Trainer uses imported oil.

Not that I'm aware of, but that doesn't mean no crude pipelines exist but presumably Trainer would have used them if they could deliver light sweet crude. That is why any ND or Canadian crude will travel by rail to upstate NY then barge down the Hudson, along the coast to the Delaware Bay and up to Trainer. If one or more crude pipelines do exist and can supply light sweet crude, the connecting lines between Trainor and any crude delivery pipelines would also be among the "transportation assets" I assume.

Crack spread was the motivation for the deal from DL's perspective.

There's an echo in here - didn't I say that was what Anderson said on CNBE earlier this week? The problem, as I said then, is that what's called "crack spread" is a lot more than just the cost of refining product from crude so owning a refinery won't eliminate it.

Jim

 

[WorldTraveler]

Since DL posted in its SEC filing, which I referenced days ago that the motivation for the refinery was based on controlling the crack spread as much as any other factor, yes, it has been noted many times.

What crude DL chooses to use and how the products will get to/from the refinery are fairly inconsequential in light of the decision that DL will be operating a refinery and will be held accountable for whether it works or not.

We can revisit that topic many times, as I'm sure many in the analyst community will do, to determine if DL has achieved its goals or not. What is far more likely is that many of those who said that the deal could never work will be shown to be wrong, not because they questioned but because the people involved in making the decision had access to far more information and options than anyone here on this forum or in the analyst community have.

 

[BoeingBoy]

Since DL posted in its SEC filing, which I referenced days ago that the motivation for the refinery was based on controlling the crack spread as much as any other factor, yes, it has been noted many times.

What's the matter WT - can't stand to be scooped? I'll note that nowhere in that filing does DL say that reducing the crack spread was as important as any other factor. Crack spread is one of four items listed but no reason is given for the order of that list. One could assume that it's in order of importance, all are equal or in no particular order. Anderson's remarks on CNBC made it clear that reducing the crack spread was among the more important considerations.

What is far more likely is that many of those who said that the deal could never work will be shown to be wrong, not because they questioned but because the people involved in making the decision had access to far more information and options than anyone here on this forum or in the analyst community have.

And ConocoPhillips just threw darts at a target to determine whether to shutter/sell Trainer?

Jim

PS - DL also gave a synopsis of the transportation assets involved in the deal in that SEC filing, yet as recently as yesterday you weren't sure what they were. When you were chastizing E in the other thread, you said something about posting the truth about subject you know well. Refining is obviously not one of them, so why not stop parroting DL's statements and presenting them as your "Truth"?

 

[QA4Jet-A]

While I don't know for sure, I'd be surprised it there wasn't a conntection to the big pipeline that runs from the Guf to NYC (Colonial pipeline??) There is also probably a crude pipeline for offloading ships/barges as well an outbound line for loading refined products.



As I understand it (which may not be right) the big pipeline running to NYC uses specific gravity to separate product - different products flow steadily when the pipeline is in operation and product is added or drawn off using specific gravity to determine the end of one product and the start of another. So jet-A would presumably be added to jet-A flowing through the pipeline or if there wasn't any going through the pipeline added between products both having enough difference in specific gravity to distinguish them from the jet-A. Obviously there is some mixing of products at the boundary between them but with the quantities involved it makes so little difference it's not worth worrying about.



I have no idea how much storage capacity is on-site at Trainer or available for lease in the vicinity, but you're right about pipeline requiring down time. The thing about Trainer is that it uses distillation with some capability of reducing the sulfur content of refined products. Thus the need for high grade crude. It doesn't do cracking, although that may be part of improvements that DL will do.

Jim

Jim, You can't just blend to an existing batch of fuel being sent. That would co-mingle the fuel and it would not be traceable The gravity would probably not match up either. In light of that, you can ship a batch of fuel either in front of or behind but still have to do a small 'cut' until the gravity matches the Certificate of Analysis sent from the Refinery. Best practice with a Multi-product pipe is to ship Jet-A after a batch of Home Heating Oil as they are almost identical, Kerosene. Even though both Home heating oil & Jet-A are Kerosene, not all Jet-A can be used for Home Heating Oil and visa versa. Home Heating Oil has a stricter limit on 'smoke' factors and Jet-A is more rigid on Jtot & Microcep, or WISM. Jet-A must meet ASTM D-1655 spec. As to wasted or cut fuel, yes, I agree it is a small amount when comparing millions of gallons of product. Example, say a 20" pipe ships 1000 GPM and it takes 20 minutes to get a matching gravity and pass millipore/free water/visual/flash point testing. 20K gallons just became regular unleaded gasoline.

 

[BoeingBoy]

Thanks for the free education - I'm learning all sorts of things for what I assumed was a fairly simple process.

Jim

 

[QA4Jet-A]

Thanks for the free education - I'm learning all sorts of things for what I assumed was a fairly simple process.

Jim

Jim, you are welcome Sir. Feel free to PM or ask away for more info if you like! I may not have all the answers at hand but they are a link or phone call away!

 

[Beancounter]

I think highly of Delta and its management team. I'm skeptical about this, but I hope that it does work out for them. It could be a good thing for the whole industry.

Bean

 

[Kev3188]

Thanks for the free education...

+1

 

[WorldTraveler]

Jim,
You perhaps noted that C's stock is at 52 week lows and that part of their motivation to unload Trainer has to do with focusing on their lines of business that produce the highest returns. that is what every company is supposed to do.
What continues to get lost in this discussion is that the motivation for decisions at a company in one industry are not the same as they are for companies in another industry. It is no surprise that oil companies have entirely different profit profiles than airlines... and when you start breaking out each of those industries there are different profiles for segments within each industry - ie domestic contracted regional carrier services have different profit concerns than do int'l flights. DL can't and won't be concerned about the whole petroleum process - but it can focus on what matters.
.
Despite the ongoing attempts to try to dissect every aspect of this deal in an attempt to at least figure it out but for many to prove that it won't work, there simply are details that have not and will not be made public. This entire deal is highly complex - which is why no airline has been willing to take on that level of complexity and figure out how to make it work. There is no assurance DL will succeed but the chances are that DL has more bandwidth NOW to solve a problem of this magnitude than any other airline in the industry. They wouldn't have taken it on several years ago and if consolidation furthers in the industry and DL has to make strategic moves, they don't want to be worrying about how to make the refinery work. They have time and energy available now to solve the problem better than anyone else in the industry.
DL didn't reveal HOW all of the transportation assets would be used or integrated with the refinery - because DL did make clear they don't intend to do everything the way it was done before.
There is information on how pipelines work that is quite publicly available that validate what QA4 says.
By increasing output of jetfuel (so far as we know but keep in mind we still don't know how many refineries will end up closing) DL will help the industry, but let's not doubt for a minute that DL is in a highly competitive industry and it will ensure that the majority of the benefits accrue to DL and not to the rest of the industry.

 

[BoeingBoy]

Jim,
You perhaps noted that C's stock is at 52 week lows and that part of their motivation to unload Trainer has to do with focusing on their lines of business that produce the highest returns.

Surely you're not suggesting that a multi-billion dollar multinational corporation's stock performance is all the result of their decision concerning a small refinery in PA??? Certainly CP's intention is to produce the highest rate of return for it's shareholders possible - that's not exactly an earth shaking revelation. The question isn't whether the party on either side of this transaction wants to improve it's margins, it's whether both can be successful - especially DL with it's predicted 20% margin.

By increasing output of jetfuel (so far as we know but keep in mind we still don't know how many refineries will end up closing) DL will help the industry...

This statement bears some scrunity. If altering the percentage of jet-A produced is such a relatively simple undertaking, why would Trainer producing more jet-A not result in other refineries producing less? Whether you're talking about the U.S. or the world market, there is a finite demand for jet-A so wouldn't there be one of two results - the other refiners as a group producing less jet-A (maintaining supply/demand relationships and keeping the price up) or an excess supply of jet-A (depressing prices and negating at least some of the advantage of operating Trainer)? Only one of those possibilities lowers jet-A prices excluding outside events - the possibility that depends on the relative simplicity of altering the amount of jet-A a refinery can produce. But if the mix of fuels produced is relatively easy to change, why are refiners already doing that to increase prices - plenty of diesel, just cut the production of diesel to raise prices while increasing production of distillates that are in short supply and already have high prices.

Jim

 

[WorldTraveler]

and you raise exactly one of the unknowns in this whole relationship. How do we know that other refineries will continue to produce as much as Jet A as they do? We don't. CP and BP certainly can't agree w/ DL that they will hold supply constant at today's levels even after a new refinery comes back online which is being done w/ the known intention of the maximum amount of jet A possible.
If the total US supply remains constant while DL gains control of 80% of its fuel needs, then it provides even more incentive for the deal to be done. Given that DL said several times since the deal was announced that they gained a guaranteed supply of 80% of their domestic needs, I think it is very possible that there is a whole lot more to this whole supply part of the discussion than we think.
I've said from the beginning, I don't know the details of this transaction and neither do you or anyone else outside of a handful of people at each of the 3 companies involved in the deal plus JPM which apparently acted as a consultant.

What you and others have battled during this entire conversation is that DL's interests and those of oil companies are different. Oil companies have never had financial strains as great as the airlines have had. They are getting out of the refinery business not because it is a threat to their existence but because the costs of operating refineries is below the level of return they expect for their share holders.

In contrast, jet fuel is the lifeblood of the airline industry. Not only does supply matter a whole lot - and there really hasn't been any global evidence that has been a problem - but the cost of jet fuel, esp. relative to a competitor - can make or break a company.

I said from the beginning of this discussion that there is more than a little chance that this deal will dramatically change the US airline industry if for no other reason than that DL is attacking a cost issue which no one else is approaching in the same way.
I don't know the details of what will happen - and that is why hindsight has the potential to verify the accuracy of most decisions - but I am certain that there will be a whole lot of people who far underestimated the magnitude of what DL is doing and who also failed to recognize alot of points which I think DL, CP/66, and BP all saw - which is why all 3 were motivated to do the deal.

 

[UPNAWAY]

You may be right WT but it sure sounds pie in the sky (to me) kind of like if the government only spends more of our money we will grow the economy!

 

[WorldTraveler]

In the following Aviation Week article, the publisher of Petroleum Economics Monthly says that the DL refinery purchase could result in a significant shift in the NYC market from other carriers to DL due to a cost advantage that could equal 20 cents/gallon or more and would be most significant to DL on long-haul flights, including the highly competitive NYC market

http://www.aviationweek.com/Article.aspx?id=/article-xml/AW_05_07_2012_p24-454371.xml

These benefits alone could give Delta a $4,000-5,000 advantage on every flight from Kennedy to London Heathrow Airport, Verleger calculates, and grow even higher should the small number of refineries located on the East Coast use the supply shortage to raise prices.
“I fully expect to see five years from now that a much larger share of the international flights from JFK will be Delta's,” says Verleger. “To really build New York and make it work, you need a cost advantage, and this gives them the cost advantage.”
..
According to Verleger, Delta's potential competitive advantage compares to Southwest Airlines' hedging policy before the spike in fuel costs that gave it a distinct cost advantage for several years over the many U.S. airlines that did not hedge. “By acquiring the Trainer refinery, Delta may pull off the same feat as Southwest,” Verleger says.
..
“With Trainer, Delta could match the competition's prices and pocket profits from lower-cost fuel,” he continues. “Alternatively, it could follow Southwest's example and initially pass the cost savings on to consumers. This would force larger losses on other airlines or cause them to exit the market.
“We bet that Delta chooses the latter option,” Verleger says.
..
The airline adds, “we're making it right in the neighborhood and we'll capture the tariffs we currently pay to pipeline companies to move jet fuel. In that the transatlantic is brutally competitive, every single penny counts.” In other Northeast U.S. locales and with exchanges for jet fuel in other locations, Delta says its fuel transport savings will be significant across the country.

..
The article also notes the environmental risk should add'l regulations be put into place to require cleaner fuel as well as the downtime necessary at refineries, although it is normal for agreements to exist to cover each other's output during downtime.