Delta Airways's New Oil Refinery: Too Unhealthy The Math Doesn't Work

Delta paid $one Petroleum Equipment hundred fifty million for a Phillips 66 refinery in Trainer PA final Might aiming to avoid wasting $300 million a 12 months in future gasoline costs. And there may nonetheless be hope for Coach but as Delta indicated in a recent SEC filing that the company is considering getting the cheaper Bakken crude by railcar. Furthermore, in accordance with Platts, “Refining experts who have done laptop simulations tell JFI that Coach economics theoretically solely work using a crude slate of distillate-rich crudes equivalent to Nigerian Forcados, which typically trade at a large premium to Brent crude.” Additionally, there seems to be another indication of troubles in Delta’s vertical-integration strategy of purchasing a refinery as a gas hedge. The ex-oil-trader-turned-Delta-VP-of-Gasoline, Jon Ruggles, left the corporate fairly abruptly late final 12 months. Ruggles, a key particular person behind the Trainer refinery deal, was employed away from Merrill Lynch less than a year ago to head Delta’s trading operation. Rumor has it that Ruggles' exit from Delta was in some way associated to losses on the Coach plant.

The newest from Delta executives is that they now anticipated Trainer to have $280 million in savings in 2013 and refine 80% if the airline's home jet gasoline requirement. And there might still be hope for Trainer but as Delta indicated in a latest SEC filing that the corporate is contemplating getting the cheaper Bakken crude by railcar. Given that transporting crude by railcar adds about $22 a barrel to the cost of oil, it is difficult to think about the economics may enhance a lot at Trainer with the current Brent premium over WTI at only round $19 a barrel.

To put it another manner, if it had been as simple as delivery Bakken oil through railcars, wouldn’t you assume ConocoPhillips, who’s only been within the oil enterprise courting again to 1875, would have figured it out lengthy before dumping the Coach asset?

Now pondering the worst is over after in depth restructuring and consolidation within the airline sector, most Wall Avenue analysts have turned optimistic towards the airline business. Delta Airlines stock has climbed 25% prior to now year outperforming the broader Bloomberg United States Airline Index, which incorporates Delta Airlines. Investment homes like J.P. Morgan already raised Delta’s 1Q 2013 revenue estimate, citing decrease gas costs and sturdy travel demand.

Chart Supply: Bloomberg Further Reading - The Market Rally Tells Us Nothing About the Economic system

Nevertheless, the very fact remains that flying is a commodity, and crude oil prices are expected to remain flat at the least in the subsequent two years as a consequence of subdued financial growth and demand. Meaning the same major elements which were negatively impacting the airline sector -- weak world GDP, excessive gasoline costs and fierce competitors- will still be there, at the very least in 2013 and 2014, with many down side risks such as the euro zone, and Iran. So typically, any improve in airline profitability could be laborious-earned from things like effectivity achieve and capacity discount.

Chart Supply: IATA On top of the robust macroeconomics, Delta has yet one more down side risk than friends - Coach Refinery.