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DL Expecting 2Q Profit From Oil Refinery.  
User currently offlineTriple7Lr From United States of America, joined Sep 2012, 97 posts, RR: 0
Posted (1 year 8 months 4 weeks 1 day 7 hours ago) and read 5215 times:

Maybe this will put an end to the speculation that it was a bad idea.

According to Reuters:

http://www.reuters.com/article/2013/...pe=RSS&feedName=marketsNews&rpc=43

Triple

34 replies: All unread, showing first 25:
 
User currently offlineDeltaMD90 From United States of America, joined Apr 2008, 7972 posts, RR: 51
Reply 1, posted (1 year 8 months 4 weeks 1 day 7 hours ago) and read 5124 times:

Quoting Triple7Lr (Thread starter):
Maybe this will put an end to the speculation that it was a bad idea.

Doubt it lol. What I've been trying to tell people is to chill out and wait... investments like these often take 5 or 10 years to pay off. Maybe DL made the wrong decision but I doubt they just out of the blue decided to do this without research... and isn't UA considering doing the same thing?

Good job DL, hope this is the first of many refinery profits!



Ironically I have never flown a Delta MD-90 :)
User currently offlineJONC777 From United States of America, joined Jun 2012, 126 posts, RR: 0
Reply 2, posted (1 year 8 months 4 weeks 1 day 7 hours ago) and read 5122 times:

Ive always wondered why people thought this was a bad idea. DL has plenty of cash to support this type of venture. With Oil being such an uncontrollable cost why not try to control what you can of it? Also they get to decide for themselevs what there source for oil will be besisdes whatever the end seller of jet fuel might have wanted to sell them. Great idea that was only a matter of time before it paid off.

User currently offlinewinginit From United States of America, joined Feb 2013, 13 posts, RR: 0
Reply 3, posted (1 year 8 months 4 weeks 1 day 7 hours ago) and read 5014 times:

Quoting DeltaMD90 (Reply 1):
Quoting Triple7Lr (Thread starter):
Maybe this will put an end to the speculation that it was a bad idea.


Doubt it lol. What I've been trying to tell people is to chill out and wait... investments like these often take 5 or 10 years to pay off. Maybe DL made the wrong decision but I doubt they just out of the blue decided to do this without research... and isn't UA considering doing the same thing?

Good job DL, hope this is the first of many refinery profits!

What's relevant here is that they bought the refinery from Phillips 66 as opposed to financing the construction of one, so it's actually reasonable that it would prove profitable so soon. That 5-10 year figure is often applicable when financing has been secured to construct a new refinery.



The postings on this site are my own and don’t necessarily represent American Airlines' positions, strategies or opinion
User currently offlineg500 From United States of America, joined Oct 2011, 1018 posts, RR: 0
Reply 4, posted (1 year 8 months 4 weeks 1 day 7 hours ago) and read 4987 times:
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You know United, American and Southwest are waiting to see how this works out for Delta before they try the same thing.

If this works out for DL, the others will follow


User currently offlineAeroWesty From United States of America, joined Oct 2004, 20791 posts, RR: 62
Reply 5, posted (1 year 8 months 4 weeks 1 day 6 hours ago) and read 4927 times:

Quoting DeltaMD90 (Reply 1):
Good job DL, hope this is the first of many refinery profits!

  

I was surprised to see a prediction of $75-$100 million in profits for the second quarter already. That would be phenomenal this soon after beginning to run at full production.



International Homo of Mystery
User currently offlineMIflyer12 From United States of America, joined Feb 2013, 1187 posts, RR: 0
Reply 6, posted (1 year 8 months 4 weeks 1 day 6 hours ago) and read 4830 times:

Quoting JONC777 (Reply 2):
With Oil being such an uncontrollable cost why not try to control what you can of it?

It's the 'what you can of it' that's the problem, because the answer is 'Not very much.' By running a refinery Delta gains some control over the crack spread, the difference between crude cost and final refined fuel price. DL is still exposed to crude costs, some mix (specific to refinery chemistry and market availability) of West Texas Intermediate, Bakken crude, and North Sea Brent grades.

Making a profit 2Q13 is a start, but it's not the $300 million annual benefit they've talked about again and again. It's fair to give them a few years but if the benefit isn't significant and repeatable (to cover the magnitude of the risks), they'll need to evaluate things in a new light.


User currently offlinemayor From United States of America, joined Mar 2008, 10601 posts, RR: 14
Reply 7, posted (1 year 8 months 4 weeks 1 day 6 hours ago) and read 4770 times:

Quoting MIflyer12 (Reply 6):
Making a profit 2Q13 is a start, but it's not the $300 million annual benefit they've talked about again and again.

Hard to say they've made that annual benefit when it only started in Q4 of 2012, isn't it? Why not complain about it after one FULL year and see where it is, then?  



"A committee is a group of the unprepared, appointed by the unwilling, to do the unnecessary"----Fred Allen
User currently offlineAeroWesty From United States of America, joined Oct 2004, 20791 posts, RR: 62
Reply 8, posted (1 year 8 months 4 weeks 1 day 6 hours ago) and read 4726 times:

Quoting MIflyer12 (Reply 6):
Making a profit 2Q13 is a start, but it's not the $300 million annual benefit they've talked about again and again. It's fair to give them a few years but if the benefit isn't significant and repeatable (to cover the magnitude of the risks), they'll need to evaluate things in a new light.

On a quarterly basis it is. $75 million x 4 is $300 million. $100m x 4 is $400m for the full year on an adjusted basis. I'm just surprised they're seeing profits coming this fast after restarting the refinery, a facility that many here claim is nothing other than a money pit. By late summer of this year we'll see where things stand. All is not lost though, the facility can always be sold on to another party as a storage unit. Something like 3 of the 4 other bidders in the sale where Delta bought it wanted Trainer solely as a storage facility.



International Homo of Mystery
User currently offlineEricR From United States of America, joined Jul 2010, 1904 posts, RR: 1
Reply 9, posted (1 year 8 months 4 weeks 1 day 6 hours ago) and read 4675 times:

Quoting DeltaMD90 (Reply 1):
What I've been trying to tell people is to chill out and wait... investments like these often take 5 or 10 years to pay off.
Quoting JONC777 (Reply 2):
Ive always wondered why people thought this was a bad idea.



What you need to understand is that refiners in general are seeing very favorable spreads at the moment (above historical levels). Even though spreads are very favorable at the moment, refining margins are still very thin (single digits). When the spread eventually contracts, so will margins. What remains to be seen is what DL's refining results are once the spread normalizes.


User currently offlineexFWAOONW From United States of America, joined Nov 2009, 410 posts, RR: 0
Reply 10, posted (1 year 8 months 4 weeks 1 day 5 hours ago) and read 4518 times:

The thing is, I don't think Delta has to see a real stand alone profit at the refinery for it to be a sucessful venture. Even if the refinery "loses money", if Delta sees a larger reduction in their overa fuel costs, they are "ahead".

I can see this as leverage to use on their fuel suppliers, "if you can't meet our price, we'll make our own, there's the door."



Is just me, or is flying not as much fun anymore?
User currently offlineAeroWesty From United States of America, joined Oct 2004, 20791 posts, RR: 62
Reply 11, posted (1 year 8 months 4 weeks 1 day 5 hours ago) and read 4426 times:

Quoting exFWAOONW (Reply 10):
I can see this as leverage to use on their fuel suppliers, "if you can't meet our price, we'll make our own, there's the door."

That's not how airlines buy fuel, though. For the most part, they pay the spot price at the pump pretty much just like you and I do when filling up our cars. They can get some discounts, and hedge around it a bit, but all fuel-buying strategies revolve around spot prices for Jet-A.

Even though this is from 2004, this PDF is a great primer for how fuel purchases and hedging works in the airline industry:

http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf



International Homo of Mystery
User currently offlineEricR From United States of America, joined Jul 2010, 1904 posts, RR: 1
Reply 12, posted (1 year 8 months 4 weeks 1 day 4 hours ago) and read 4343 times:

Quoting exFWAOONW (Reply 10):
The thing is, I don't think Delta has to see a real stand alone profit at the refinery for it to be a sucessful venture. Even if the refinery "loses money", if Delta sees a larger reduction in their overa fuel costs, they are "ahead".



It's not a matter of whether they make or lose money on the refinery per se. It is the opportunity cost associated with running their own refinery versus buying fuel on the open market. DL has all the cost risk. During times when refineries are shut down due to maintanence or cannot operate at full capacity, DL still has to bear all costs. There is not a lot of fat DL can cut out by operating its own refinery because refineries already operate at thin margins to begin with.

Quoting exFWAOONW (Reply 10):
I can see this as leverage to use on their fuel suppliers, "if you can't meet our price, we'll make our own, there's the door."


They cannot do this for several reasons. First of all, refineries have a capacity limits. This refinery cannot full-fill DL's total fuel requirements. In fact, it cannot even full-fill a quarter of their fuel requirements. Secondly, if you read the article, DL operated the refinery at 75% capacity and broke even. In the second quarter, they expect (note the key word expect) to make $60 million operating at 100% capacity, however, this is a forecast.

Also, operating at 100% capacity for long periods is easier said than done. They are not going to be able to operate their refinery at 100% capacity indefinitely due to routine maintenance, emergency shut downs, etc. Furthermore, it sounds as if at a 75% capacity, the best they can do is break even. Therefore, assuming all else remaining consistent, anything below a 75% capacity causes them to lose money, and this is under a very favorable current environment for refiners.


User currently offlinetoobz From Finland, joined Jan 2010, 802 posts, RR: 0
Reply 13, posted (1 year 8 months 4 weeks 1 day 4 hours ago) and read 4268 times:

.....and I was wondering where the naysayers where!! lol.
yes these are forecasts. research has been done by parties close to this project. they feel they will see revenue gain from this. That's what a forecast is! It would be highly unethical of Bastian to come out in public and make assumptions that he had no idea what he was talking about. Plz remember, this is not the same mngmt team running UA  


User currently offlineairtechy From United States of America, joined Dec 2006, 513 posts, RR: 0
Reply 14, posted (1 year 8 months 4 weeks 1 day 3 hours ago) and read 4189 times:

Hers a better writeup of how Delta stands. I may have to buy more stock.

http://www.thestreet.com/story/11858....html?puc=CNNMONEY&cm_ven=CNNMONEY

Jim


User currently offlinePIEAvantiP180 From United States of America, joined Sep 2009, 557 posts, RR: 0
Reply 15, posted (1 year 8 months 4 weeks 1 day 3 hours ago) and read 4143 times:
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Quoting airtechy (Reply 14):
I may have to buy more stock.

I think you might have missed that boat, DL stock today is at its highest in years. I'm not sure how much upside does the stock have before it retracts a little bit. $16 target is what i have seen in recent months by many analysts and its at $15.65 now. Glad to see DL forecasting a profit for the refinery operation. I'm guessing the other airlines will wait till the year end results before they make a decision on the refining business.


User currently offlineairtechy From United States of America, joined Dec 2006, 513 posts, RR: 0
Reply 16, posted (1 year 8 months 4 weeks 1 day 2 hours ago) and read 3957 times:

Something is certainly driving Delta stock upwards, but I have to believe that the investment community considers the purchase of the refinery to be a net positive. A first quarter profit is another plus.

Those were interesting comments Bastian made about the role that Delta sees itself in the New York to London route. It sounds like they see improving their share of it as one of the key points in winning more of the corporate contracts.... along with improving the JFK to west coast service.

Jim


User currently offlineKC135TopBoom From United States of America, joined Jan 2005, 12175 posts, RR: 51
Reply 17, posted (1 year 8 months 4 weeks 1 day 2 hours ago) and read 3919 times:

Quoting winginit (Reply 3):
What's relevant here is that they bought the refinery from Phillips 66 as opposed to financing the construction of one

They had no choice, you either buy an exsisting refinery, or you don't get one at all. The US EPA will not permit a new refinery anywhere in the US. There hasn't been a refinery built in the US in more than 30 years. The ones we do have are old and inefficent, all they can do is fix what we have and a little add on to the facility.


User currently offlinesonomaflyer From United States of America, joined Apr 2010, 1872 posts, RR: 0
Reply 18, posted (1 year 8 months 4 weeks 1 day 1 hour ago) and read 3875 times:
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We are seeing on the balance sheets and income statements what happens when you have a creative and motivated management team along with stable labor relations at an airline. They bought the refinery to help knock down some of their fuel costs and may do better than that if the plant doesn't have unexpected shut downs.

Looking overall, DL is the airline to beat in North America. Their j/v with VS will take the most lucrative international market from the U.S. and enable them to have a bigger presence from LAX and SFO to LHR. UA and AA now have a template in front of them of how to run an airline, lets see if they put at least some of DL's corporate characteristics to work.


User currently offlineDeltal1011man From United States of America, joined Sep 2005, 9672 posts, RR: 14
Reply 19, posted (1 year 8 months 4 weeks 1 day ago) and read 3777 times:

Quoting Triple7Lr (Thread starter):

nope. Its all a lie. Its going to fail. all the arm chair CEOs on a.net said so. They know more about Delta than Delta.



yep.
User currently offlineProst From United States of America, joined Oct 2012, 1120 posts, RR: 1
Reply 20, posted (1 year 8 months 4 weeks 1 day ago) and read 3729 times:

There will either be a dividend or a stock buyback in the future, so Wall Street should be pleased with that.

User currently offlinecommavia From United States of America, joined Apr 2005, 11840 posts, RR: 62
Reply 21, posted (1 year 8 months 4 weeks 1 day ago) and read 3617 times:

Quoting Triple7Lr (Thread starter):
Maybe this will put an end to the speculation that it was a bad idea.

No, it doesn't - for multiple reasons.

First, so far what we have is Delta's expectations. They have yet to fully prove to the markets that this was actually an economically viable endeavor.

Second, even if this endeavor does turn out to be profitable, that doesn't necessarily mean it was a good idea. That just means its profitable. The real indicator of "good idea" is the opportunity cost of Delta could have done with that money. If this oil refinery generates a greater economic return than the alternative uses where Delta could have invested that money, then it will have been a good idea.

But all that being said, it's just too early to tell. Delta simply stating that they expect a profit in the future doesn't "end speculation" one way or another, just as neither did some opinion piece from the internet a few weeks ago that many others jumped on as essentially confirmation that it was a bad idea. Only time will tell.


User currently offlinecjg225 From United States of America, joined Feb 2013, 875 posts, RR: 0
Reply 22, posted (1 year 8 months 4 weeks 23 hours ago) and read 3590 times:

Really glad to see this working out, to some extent, for DL so far.

Quoting commavia (Reply 21):
Second, even if this endeavor does turn out to be profitable, that doesn't necessarily mean it was a good idea. That just means its profitable. The real indicator of "good idea" is the opportunity cost of Delta could have done with that money. If this oil refinery generates a greater economic return than the alternative uses where Delta could have invested that money, then it will have been a good idea.

Typically, businesses make that sort of calculation before making an investment... they're not always right in their assumptions. The venture can tank, the venture can underperform... but the problem with opportunity cost is that you don't usually ACTUALLY know what would happen if you took the alternative. Your assumptions can be just as wrong there.



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User currently offlineAeroWesty From United States of America, joined Oct 2004, 20791 posts, RR: 62
Reply 23, posted (1 year 8 months 4 weeks 23 hours ago) and read 3551 times:

Quoting commavia (Reply 21):
The real indicator of "good idea" is the opportunity cost of Delta could have done with that money.

Well let's see. Outlay, $150 million. Expected benefit, $300 million per year. If it doesn't pan out, they can still sell it as a storage facility. Not a huge risk, and few other opportunities to earn 200% on one's capital out there these days. SQ certainly didn't make that kind of return on their investment in VS.



International Homo of Mystery
User currently offlinePIEAvantiP180 From United States of America, joined Sep 2009, 557 posts, RR: 0
Reply 24, posted (1 year 8 months 4 weeks 22 hours ago) and read 3409 times:
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Quoting AeroWesty (Reply 23):

Right on. Lets just put it in airplane terms. $150mil can get you a 777 these days. Last year DL made just a little over $1.5Bil (and that's a good year) with a mainline fleet of 722 planes and for arguments sake we are not going to count the RJ fleet. That means on average they made about $2mil per plane. Now we know that DL likes to own their planes for 25-30 years and if they can make 2-3mil per plane per year for 30 years it comes out to 60-90mil, so during the life of the plane DL newer got their money back. I know that international planes make more then domestic but i'm just going to use averages for this argument. So if DL spent $250mil on the high side for buying, renovating, and restarting the refinery and they expect a 200-300mil per year profit, on the book this a a better investment then buying a new 777.


25 deltaguy767 : Sorry but don't think so, from a corporate finance perspective this would be a very bad move. Dividends are typically only issued by blue chip compan
26 MSPNWA : It won't, and it shouldn't either. And this is why: Correct. Just as a loss doesn't mean that this was a bad idea, a profit doesn't say it was a good
27 Post contains images mayor : And, yet, in the previous thread on this subject, when they had lost $63mil, you were ready to condemn them and say it was a bad idea, AT THAT POINT.
28 Post contains links Prost : This article: http://www.reuters.com/article/2012/...elta-outlook-idUSL1E8NC3PS20121213 States the following: Delta also said it expected to outline
29 Pellegrine : More than that, you're exposed to how marketable your products are. The reason oil companies, IOCs and small operators, have been getting out of the
30 mcg : This is good news for DL, they seem to be executing the 'last man standing' strtegy in the east. The closure of the Hess refineries are good news for
31 Coronado : After reviewing these posts I conclude that a management team of Delta's caliber is better suited to run a refinery than the wildcatters who run the u
32 Deltal1011man : then no one on here will ever know. To bad so many will act like they do. I would be very, very, very shocking to see a dividend. I expect a buyback.
33 Post contains images mayor : And what do you expect? We're only partway thru the 2nd quarter of operation. Makes you wonder how clairvoyant you expect them to be? What else do yo
34 Deltal1011man : Over a one loss.....mostly due to Sandy. I know an airline that is BANKRUPT but i have yet to see anyone of these AAirlines lovers say a negative wor
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