UALWN
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DL Losing Money In Refinery

Mon Feb 04, 2013 11:22 am

According to this article, DL's last year "genius" move to buy an oil refinery in Pennsylvania may not have been so brilliant after all. It incurred heavy losses in Q4 2012, and the prospects, according to this analysis, are not particularly good for 2013 either. Interestingly, John Ruggles, who engineered the purchase, left DL abruptly at the end of 2012.

http://seekingalpha.com/article/1152...the-math-doesn-t-work?source=yahoo
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deltal1011man
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 11:47 am

Quoting UALWN (Thread starter):
It incurred heavy losses in Q4 2012,

               so did ever single hub in the NE. maybe DL should dump its JFK/LGA hubs too.  


come on, i guess we didnt hear about Sandy
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toobz
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 12:09 pm

I don't think DL ever expected to be making money off of it yet. It's a long term investment..not a get rich over night scheme. Give it time.
 
Tdan
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 12:15 pm

Quoting Deltal1011man (Reply 1):
so did ever single hub in the NE. maybe DL should dump its JFK/LGA hubs too.


come on, i guess we didnt hear about Sandy

That's not referring to airline hubs, but to the refinery. Sandy had a material effect, but that is not the point of the analysis. The point is that the investment seems to be short-sighted and will not produce the intended results - that is to act as a fuel hedge.

This entire deal reminds me of Liar's Poker where the bankers would "blow up" customers by unloading some toxic assets either to force them out of the market or to help another, more lucrative deal go through. It seems like the latter could have happened here as Trainer was dead-weight on Phillips 66 and needed to be sold off in order for ConocoPhillips to achieve more value (and thus a higher banking commission) for the transaction. Additionally, a commission was earned on the sale to DL.

This is definitely an opinion article, but it is backed up by some interesting analysis. I'm curious to see how it all plays out, but I have been very bearish on this deal from the very beginning. Ruggles departure is very telling...
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Bongodog1964
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 12:18 pm

Quoting Deltal1011man (Reply 1):
Quoting UALWN (Thread starter):
It incurred heavy losses in Q4 2012,

so did ever single hub in the NE. maybe DL should dump its JFK/LGA hubs too.

The thread isn't talking about losses from flying activities, its specifically about losses from the recently purchased refinery. It appears that the physical set up of the refinery results in it requiring African crude oil, that sells at quite a premium to Brent crude. This then pushes up expenditure and results in an operating loss.

Looks like DL bought a pup.

Traditionally major airlines haven't even been very good at running aircraft profitably, can't quite work out why they thought they could run a refinery successfully.
 
SYDSpotter
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 12:29 pm

Quoting bongodog1964 (Reply 4):
Traditionally major airlines haven't even been very good at running aircraft profitably, can't quite work out why they thought they could run a refinery successfully.

This move by DL always seemed puzzling to me. The message that DL was effectively sending to the market was that by investing in oil/refinery, it would generate a greater return (in the form of lower fuel expenses) than investing in their core business (i.e. running an airline, flying planes etc - higher revenues). If the shareholders of DL wanted to invest in oil, they would invest in an oil company not get DL to do it.

There are better ways to mitigate fuel prices such entering into hedges and even though they are susceptible to fluctuations, but at least you need to outlay $millions buying an oil refinery!!

[Edited 2013-02-04 04:31:57]
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Wisdom
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 12:47 pm

It doesn't matter that the refinery isn't making money.
About 50% of crude can be processed into kerosine, with the rest processed as other products.

If the refinery sells the kerosine to Delta at less than market price, there is your margin for Delta.

The higher oil price of the oil that the plant can process is offset by the lower cost of processing it. Cheaper Brent costs more to process. I don't regard this as a hedging. Strictly speaking, DL cut one of the middle men. That's all.
 
deltal1011man
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 1:12 pm

Quoting Tdan (Reply 3):
That's not referring to airline hubs, but to the refinery.
Quoting bongodog1964 (Reply 4):

you guys missed my point.

The refinery lost money in Q4 due to Sandy, this was made very clear on the investor call. What i was saying if the refinery is a failure because of the Q4 loss then so is every airline hub in the NE because they all lost money during the storm.
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UALWN
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 1:22 pm

Quoting Deltal1011man (Reply 7):
The refinery lost money in Q4 due to Sandy

The article adresses this point, and concludes that, with or without Sandy, DL's business model with respect to the refinery is flawed.
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NYCAdvantage
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 1:34 pm

Quoting Wisdom (Reply 6):

Add to that the closure of Hess port reading refinery, and you will tell me how much more Delta is going to save,
I still believe DL is going to save money from thei refinery deal.
 
wjcandee
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 1:49 pm

Delta, a public company with gargantuan disclosure obligations, has just said it expects to make $280 million this year in savings by owning the refinery.

I would put much more stock in that than some dude who is just dying to say "I told you so".
 
PSU.DTW.SCE
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:01 pm

I don't see a whole lot of detailed analysis in that opinion piece that would give me much insight either way of what to expect from DL's Trainer facility.

Yes, DL charged a $100 M loss in Q4 due to Hurricane Sandy ($63 M related to Trainer and reduced capacity).

However, all this article seems to do is try to pull in a lot of macro-economic conditions that could vary one way or another.

The real test will be see what DL says about the full year 2013 performance of Trainer, after at the begininng of the year stating the expect to make $280 M from its operation. 90 performance, especially during start-up and the impact of natural disasters is too short to cast judgement.
 
wjcandee
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:06 pm

An important premise of the article is that to import North Dakota crude oil will "add $22 per barrel in transportation cost" to the very-low-cost of that oil, which has the benefit of being very light and sweet, i.e. easy to process.

An article in Reuters estimates the cost to rail ship that oil as actually being about $12 more per bbl than current oil from Nigeria.

The $10 difference in transportation cost estimated by the article as compared to the Reuters (and Delta) estimate is probably a significant source of the different overall estimates.

And remember, if the REFINERY SUBSIDIARY loses money, this isn't necessarily a loss for Delta on its overall plan, which is for the airline subsidiary to save almost $300 million in the price it pays whatever supplier(s) for aviation fuel.
 
Triple7Lr
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:07 pm

Quoting PSU.DTW.SCE (Reply 11):

Ditto. And if they can't generate a profit or savings from the refinery soon I hope they can swallow their pride and cut their losses.
 
wjcandee
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:20 pm

Totally disagree on need to create a profit "soon". This is a long-term play, with an absurdly-quick anticipated payback timetable. Most desireable capital projects look at a 5-6 year window for recovery of investment. This one was expected to be six months, which was why it was a no-brainer, once risks were controlled. That gives them a lot of time to tweak the process to get it right. Heck, in a couple of years they could be piping in nearby fracked Pennsylvania or New Jersey oil.
 
b2319
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:23 pm

Quoting PSU.DTW.SCE (Reply 11):
However, all this article seems to do is try to pull in a lot of macro-economic conditions that could vary one way or another.

A very important point; well made.

Not quite my industry, but close. I've considerable experience in the purified terephtalic acid (PTA) industry. (Not my core industry, though).

On a PTA job, working with Sinochem, the debate whether to start up the plant, or not, was a daily discussion. All those 'ex- pat' costs for the start up were irrelevant if you could blend an extra 1% of p-xylene (feedstock to PTA) into gasoline at the time; makes our costs trivial. Hence, for my CV, an 'enforced' spell at Liaoyang, Liaoning, doing, erm 'nothing'!

However, I wish Delta the best with this, providing they've kept the manufacturing and supply experience, T&Cs, etc.....

In plain English, it's a rather sophisticated version of 'hedging your bets'.

Let's wait and see what happens.

Cheers

B-2319
 
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enilria
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:30 pm

Quoting PSU.DTW.SCE (Reply 11):

I don't see a whole lot of detailed analysis in that opinion piece that would give me much insight either way of what to expect from DL's Trainer facility.

Ruggles leaving is a big deal. I had not heard that. Whether he quit or was fired is irrelevant. This was his baby and without him leading it, I question whether there is anybody else at Delta with the expertise necessary to manage it. Many may think he screwed up buying it, but he was also the guy charged with the hedging program that access to this plant was supposed to add value to. Regardless, some or all of the value of this unique hedging strategy has been nullified.
 
rwy04lga
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:32 pm

Quoting bongodog1964 (Reply 4):
Traditionally major airlines haven't even been very good at running aircraft profitably

If they weren't profitable, how would they ever become 'major airlines'? FYI, Delta made $1.6B profit last year. How did your favorite airline fare? Delta isn't 'running the refinery', Monroe is. Am I to respect a journalist that relies on 'rumor' and thrice incorrectly spells the name of the company in question? Even a quick glance at Wikipedia shows it to be spelled 'Delta Air Lines'. Any journalist worth his salt should AT LEAST correctly spell the name of the name of the company he's writing about. Leads me to conclude that the journalist's research is flawed (or at least lazy) and, by extension, so is the article. Let's revisit this thread in a year and see who says 'I told you so'. I'm confident that Delta knows what it's doing.
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PSU.DTW.SCE
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:33 pm

Quoting enilria (Reply 16):
Ruggles leaving is a big deal. I had not heard that. Whether he quit or was fired is irrelevant. This was his baby and without him leading it, I question whether there is anybody else at Delta with the expertise necessary to manage it.

Agreed. The fact that he departed, lends itself to many questions and doesn't help to quell any speculation.
 
commavia
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:34 pm

First, this isn't an article - it's essentially an editorial. Second, while I myself have doubts about Delta's oil refinery strategy, I still think it's too early to fairly assess it as either a success or failure.
 
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enilria
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:41 pm

Quoting PSU.DTW.SCE (Reply 18):
Quoting enilria (Reply 16):
Ruggles leaving is a big deal. I had not heard that. Whether he quit or was fired is irrelevant. This was his baby and without him leading it, I question whether there is anybody else at Delta with the expertise necessary to manage it.

Agreed. The fact that he departed, lends itself to many questions and doesn't help to quell any speculation.

Was he replaced yet? I hadn't seen anything on this. If they don't go out and get another oil and gas heavyweight from Wall Street or a major oil company, I suspect Trainer's days are numbered.

To further add to that, knowing what I know of the corporate world...if they put another high profile advocate in place for Trainer it has a chance of going forward, otherwise what will happen is that nobody will want to advocate for this thing and risk their own career when it is already tied to a departed exec who it is far easier to simply blame in his absence. The execs need to step up and put another strong advocate in place if they don't want it to wither and die.

[Edited 2013-02-04 06:44:30]
 
txjim
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:41 pm

Delta bought the refinery because the "crack spread" (profit margin per barrel of oil) had reached an all-time high. http://en.wikipedia.org/wiki/Crack_spread

I seem to remember that it had reached $17 when the decision was made. It averaged less than $5 prior to 2000, started rising in 2002 and is skyrocketing for gulf coast refineries. Appears to be in the $25 range now.

source for historic numbers: http://allenergyconsulting.com/blog/...refining-margin-outlook-sept-2012/
Source for current WTI: http://www.bloomberg.com/quote/CRKS321C:IND

This is what Delta is attempting to control and it does seem to make sense.
 
deltal1011man
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:54 pm

Quoting UALWN (Reply 8):
The article adresses this point, and concludes that, with or without Sandy, DL's business model with respect to the refinery is flawed.

Not really. It does nothing but guess with a tons of ifs and maybes.

Quoting txjim (Reply 21):
This is what Delta is attempting to control and it does seem to make sense.

pretty much
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centralma
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 2:57 pm

I can't speak at all to the way the refinery is engineered, or to transportation costs, or any oil industry specific detail.

But there CAN be real advantages (tax and investment-wise) to having a subsidiary being a supplier (or consumer, for that matter). Effectively, the owner can manage where expense to the owner goes and what revenue goes to the subsidiary...and the timing. Even when it it is all rolled up into consolidated statements and such transfers wash out...

My point is only that there is much more to the equation than just profit or loss at a subsidiary alone in both good and bad years.

(Although an engineer, I have long-time service on a Board of Directors for a $20M company where there are numerous subsidiaries, both wholly and partially owned...both arms length and non-arms length transactions...by no means an expert, but do have some direct experience.)
 
MD88Captain
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 3:08 pm

The water cooler talk is that DAL is very happy with the refinery deal. It is turning out to be better than expected and is on it's way to being an innovative home run.
 
Flighty
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 3:29 pm

While in general, I don't feel that airlines fuel hedging has much if any merit (and such hedging is often misnamed; always buying forwards is not a hedge), I did think this refinery promised to drive the local price down.

Some believed the acquisition was more about the pipelines and ability to cross-shop deliveries. DL was entering the oil distribution business, in effect, to avoid being stolen from by that business. It was a cool idea. Nobody expected them to buy that mothballed facility. I thought it was very clever. But, what if the pipelines need billions of dollars in repairs... hopefully they can avoid being killed in a business they probably do not understand.
 
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enilria
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 3:32 pm

Quoting Md88Captain (Reply 24):
The water cooler talk is that DAL is very happy with the refinery deal. It is turning out to be better than expected and is on it's way to being an innovative home run.

As I said, the fact the leader of the program is gone is bad either because he was fired because it wasn't going well or he left because he was on a career high. Either way it is now rudderless unless they put another knowledgeable person in the spot. The fact they didn't mention his departure on the quarterly call speaks volumes.
 
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STT757
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 3:39 pm

The refinery business is in a major transformation, dozens are closing because they are unprofitable.

Hess is closing their joint Venezuelan refinery in St.Croix:

http://www.hovensa.com/

Hess is also closing their Port Reading NJ refinery:

http://www.nj.com/business/index.ssf...losure_of_hess_port_reading_r.html

The former Chevron Refinery in Perth Amboy is getting a new owener, Buckeye, who is investing $200 million to expand it's production. Buckeye is betting big on being able to process oil from Bakken fields. There's a quote about DL's operation:

Quote:
High crude prices in the Northeast had prompted recent refinery sales including that of Philadelphia-area facility Trainer bought by Delta Airlines. Some analysts said unless it imported cheaper oil by train or boat, Delta would be hard pressed to make money.

Apparently Buckeye has some "unidentified" customers lined up, they mentioned jetfuel:

Quote:
But now Buckeye is exploring the option of importing Bakken crude by train at the behest of several unidentified customers.

The company’s management is keeping an eye on the jet fuel market as it also considers expanding pipelines to John F. Kennedy International Airport in the future, according to an investor presentation this spring.
http://www.nj.com/business/index.ssf...erth_amboy_refinery_to_get_ne.html
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panamair
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 3:51 pm

Quoting enilria (Reply 26):
. Either way it is now rudderless unless they put another knowledgeable person in the spot. The fact they didn't mention his departure on the quarterly call speaks volumes.

On the same call, Richard Anderson was asked if he had any regrets about the Trainer transaction (given the Sandy-related loss):

Linda Loyd - Philadelphia Inquirer: So you are still very satisfied with your business decision to buy a refinery?

Richard H. Anderson - CEO: More – actually – since we have actually closed on the refinery and spent a lot of time in the turnaround process, we have become more certain of how prudent that investment is for our Company.
 
mcg
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 4:24 pm

Quoting Wisdom (Reply 6):
It doesn't matter that the refinery isn't making money.
About 50% of crude can be processed into kerosine, with the rest processed as other products.

If the refinery sells the kerosine to Delta at less than market price, there is your margin for Delta.

Sorry, you can't reduce fuel cost by running a money losing refinery. The only way you can make money in this deal is for the refinery to operate profitably by selling refined products at market prices. Simply owning a refinery doesn't achieve anything.

The challenge is how to transform the Trainer operation into a profitable business. Conoco, with 100 years of experience in the refining business, couldn't figure out how to do so. I don't see any evidence that Delta has any special skill that will allow them to operate this business profitably.
 
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DeltaMD90
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 4:39 pm

Wow, it isn't immediately making money, let's shut it down. Look at the money pit Virgin America, that abomination is still flying. Maybe not the best example, but my point is I don't know if DL will make money on it or not, it may be a big flop like a lot of other things DL did in the past, but it's pretty soon to be freaking out about a loss... I never thought it would be an instant profit or everyone would be doing it. If it does indeed make money, it'll be years down the road
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rwy04lga
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 4:45 pm

Quoting mcg (Reply 29):
I don't see any evidence that Delta has any special skill that will allow them to operate this business profitably.

Again....Delta isn't running this business, Monroe Energy is. A lot of people seen to want to ignore that fact.
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MaverickM11
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 4:51 pm

Quoting mcg (Reply 29):
Sorry, you can't reduce fuel cost by running a money losing refinery. The only way you can make money in this deal is for the refinery to operate profitably by selling refined products at market prices. Simply owning a refinery doesn't achieve anything.

   I just don't get how this is supposed to work. Monroe could sell the oil to DL for free and DL would look great while Monroe was losing its shirt, *minus* the cost of the refinery. Or Monroe could sell it to DL at market rates and DL would be no better off, but again minus the cost of the refinery.

Quoting rwy04lga (Reply 31):
Again....Delta isn't running this business, Monroe Energy is. A lot of people seen to want to ignore that fact.

...a wholly owned subsidiary of DL.
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Tan Flyr
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 4:53 pm

There have bbeen several articles in business publications about the changes coming to east cast refiners (the ones that are left) . Crudes from Bakken and Canada are making thier way, or will be in greater volume within a year. There are projects to convert underused Natural gas lines across Ohio and PA to carry crude oil from other mis-west pipeline conncections to the Philly area. Local Shale gas is quickly replacing the need to "import" gas from Texas and Louisiana.

Addittionally, BNSF and other railroads are taking a big page from the past, and are transporting hundreds of thousands of barrels each week by rail. The FOB price of the surging North Dakota and Canadian production has declined (to attract buyers that can transport it) to the point where it IS economical to transport by rail, just as America did prior to WWII.

A pipleine called " The Big Inch" was the first to bring Texas crude to PA/ NJ to avoid the tankers being sunk by German U boats in 1943 as I recall being told.

In another year, the PA And NJ refineries will findthemselves refining mostly US / Canadian crude, and will no longer be subject to the Brent pricing on Nigerian and Gaboneese Crudes.

Long term DL made the right move
 
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hOMSaR
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 4:59 pm

Quoting Wisdom (Reply 6):
If the refinery sells the kerosine to Delta at less than market price, there is your margin for Delta.

But that comes at an opportunity cost. The opportunity cost is selling that same kerosene at market rates (whether to Delta, or to some other company, and thus taking in a bunch of money, some of which could go to offset Delta's market-rate fuel purchases).

If I plant an apple tree because I don't want to pay the grocery store to buy apples, I'll certainly cut down on my grocery bill. But if I could sell those apples (rather than eating them myself) for a higher price than I could buy apples from the store, then I'd actually be better off doing so. If I could sell apples from my tree for the same price that I could buy them from the store, then it doesn't really make a difference if I eat my own apples or buy them from the store while selling the ones I grow.

Quoting wjcandee (Reply 12):
And remember, if the REFINERY SUBSIDIARY loses money, this isn't necessarily a loss for Delta on its overall plan, which is for the airline subsidiary to save almost $300 million in the price it pays whatever supplier(s) for aviation fuel.

It depends on whether the losses (if there are any) from the refinery exceed the savings to Delta's fuel bill. If the refinery loses $1 but Delta saves $2 on fuel costs, then they come out ahead. If it loses $2 to save Delta $1, they are behind on the deal.
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rwy04lga
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:00 pm

Quoting MaverickM11 (Reply 32):
Quoting rwy04lga (Reply 31):
Again....Delta isn't running this business, Monroe Energy is. A lot of people seen to want to ignore that fact.

...a wholly owned subsidiary of DL.

They're not RUNNING(operating) it. You know that, you're just being difficult. Ownership is irrelevant. C'mon, someone as smart as you can easily figure that out, you just don't want to admit it.
Just accept that some days, you're the pigeon, and other days the statue
 
EricR
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:04 pm

Quoting Md88Captain (Reply 24):
The water cooler talk is that DAL is very happy with the refinery deal. It is turning out to be better than expected and is on it's way to being an innovative home run.



  Until they sell it and inform everyone of what a bad idea it was.

Quoting STT757 (Reply 27):
The refinery business is in a major transformation, dozens are closing because they are unprofitable.


Margins on refineries are very thin (low single digits) and new refineries are rarely built. The last complex refinery was built in 1977. The last simple refinery was built in 2008 and prior to this time, the last simple refinery was built in 1997.

The lack of new refineries built over the past 20 years should have been an indication to DL that the refining business was a challenging business to operate.

Conoco did a brilliant job of selling the refinery to DL during a time of high fuel prices, thus reinforcing the false concept that purchasing a refinery would be financially beneficial to DL.

http://www.eia.gov/tools/faqs/faq.cfm?id=29&t=6
 
rwy04lga
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:04 pm

Quoting hoMsar (Reply 34):
But if I could sell those apples (rather than eating them myself) for a higher price than I could buy apples from the store, then I'd actually be better off doing so.

No, you'd buy the apples at the store for a lower price and resell them at a higher price.
Just accept that some days, you're the pigeon, and other days the statue
 
mcg
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:06 pm

Quoting hoMsar (Reply 34):
If I plant an apple tree because I don't want to pay the grocery store to buy apples, I'll certainly cut down on my grocery bill. But if I could sell those apples (rather than eating them myself) for a higher price than I could buy apples from the store, then I'd actually be better off doing so. If I could sell apples from my tree for the same price that I could buy them from the store, then it doesn't really make a difference if I eat my own apples or buy them from the store while selling the ones I grow.

Exactly, well put, thank you.

Quoting rwy04lga (Reply 31):
Quoting mcg (Reply 29):
I don't see any evidence that Delta has any special skill that will allow them to operate this business profitably.

Again....Delta isn't running this business, Monroe Energy is. A lot of people seen to want to ignore that fact.

Delta owns Monroe. Monroe is Delta.
 
LAXdude1023
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:09 pm

I think its way too soon to say if the refinery was a bad move or a good one. Its a long term investment and it wont be clear for another few years.
It is what it is...
 
MaverickM11
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:14 pm

Quoting EricR (Reply 36):
Conoco did a brilliant job of selling the refinery to DL during a time of high fuel prices, thus reinforcing the false concept that purchasing a refinery would be financially beneficial to DL.

Has Conoco said anything about the deal? Kinda like how US said they were hundreds of millions of dollars better off w/o LGA ?

Quoting rwy04lga (Reply 35):

They're not RUNNING(operating) it. You know that, you're just being difficult. Ownership is irrelevant. C'mon, someone as smart as you can easily figure that out, you just don't want to admit it.

How is that different? Monroe's bottom line is DL's bottom line.

Quoting LAXdude1023 (Reply 39):
I think its way too soon to say if the refinery was a bad move or a good one.

I agree. I just don't understand how this isn't simply money from DL's left hand to its right and calling it a gain.
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mayor
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:20 pm

Quoting wjcandee (Reply 10):
I would put much more stock in that than some dude who is just dying to say "I told you so".

There seems to be a few of those, right here on this thread.

Quoting rwy04lga (Reply 31):
Again....Delta isn't running this business, Monroe Energy is. A lot of people seen to want to ignore that fact.

Conveniently




Unless I'm mistaken, I thought the point of the whole thing was for Trainer to produce jet fuel for DL's OWN operation at a lower price or, at least, with lower costs.

I also understood that DL was going to start bringing in oil from North Dakota instead of using the African crude, thereby making the operation less reliant on foreign oil.

Quoting SYDSpotter (Reply 5):
This move by DL always seemed puzzling to me. The message that DL was effectively sending to the market was that by investing in oil/refinery, it would generate a greater return (in the form of lower fuel expenses) than investing in their core business (i.e. running an airline, flying planes etc - higher revenues). If the shareholders of DL wanted to invest in oil, they would invest in an oil company not get DL to do it.

Do you not think that investing in fuel, whether by supply or refining, is not "investing in the company"? It may not be the "core" business, but it certainly is DL's highest expense, nowadays. This was "out of the box" thinking, so perhaps, long held beliefs in acquisition, manufacturing, etc. of your fuel don't apply, anymore.
"A committee is a group of the unprepared, appointed by the unwilling, to do the unnecessary"----Fred Allen
 
wjcandee
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:34 pm

Quoting hoMsar (Reply 34):
If I plant an apple tree because I don't want to pay the grocery store to buy apples, I'll certainly cut down on my grocery bill. But if I could sell those apples (rather than eating them myself) for a higher price than I could buy apples from the store, then I'd actually be better off doing so. If I could sell apples from my tree for the same price that I could buy them from the store, then it doesn't really make a difference if I eat my own apples or buy them from the store while selling the ones I grow.

Yawn. Let's use an example of no relevance here.

If you assume that all markets operate efficiently at all times, you can make a lot of strategic mistakes.

One of Delta's stated perceptions was that the market was distorted, and that the refined product's price did not reflect drops in the price of the raw inputs. Choices made by refiners as to the quantity of various fuels that they chose to produce, and their ability to grab a higher crack spread on Jet A than might exist in an environment where refinery capacity was limited only by capital commitments and not by a host of other issues, like regulations, NIMBYs, etc., and the delivered-product market was not heavily-affected by transportation capacity and cost, had affected the price of this product to the airlines generally and to Delta specifically.

The observation that new refining capacity in this country has been minimal in the past X years is a statement only of a static fact, and I believe that it is an unreasonable deduction that no new capacity has come on only because it isn't "profitable" to be in the refining business. Fact is that there are lots of barriers to entry beyond the availability of capital and the profitability of refining, and it is also in the interest of the few refiners in the US to NOT increase capacity, as reflected in a growing crack spread on certain products.

By being in a position to control the decision as to what products are manufactured, where, and at what profit margin allows Delta to influence the overall market for Jet A, by allowing it, at a simplistic level, to introduce more competition. The CFO has also said that by adding just one more potential supplier of Jet A to the mix, they are able to cut deals with other suppliers that are more favorable than they have been able to make in the past.

This was a relatively-small investment that, assuming it can be operated near break-even, should turn out to be a good one.
 
jayunited
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:42 pm

I think it is much to soon to say Delta made a mistake in buying this oil refinery. I think this investment that Delta made has to be given time to mature just like any other investment a company would make. I know Delta has expectations and they had expected the refinery to save them millions of dollars in fuel cost in the first year or so. I think this is where Delta made a mistake was in the time frame that they expected to see those savings materialize. United told employees last year that they were studying Delta's move to buy this refinery and if it works for Delta then United might follow suit. I'm sure United is not alone, the entire aviation industry is watching this oil refinery deal and probably hoping that Delta made the right move because a move like this could potentially save airlines hundreds of millions of dollars a year in fuel cost. The aviation industry knows that right now it is to soon to call this investment a lost.

I think that the person who wrote this article is looking at one side of the equation only comparing Delta to Exxon Mobile is ridiculous. Delta just came into the oil business (give them time to get their feet wet) while Exxon has been in the business for years so of course we all expect Exxon to make money. It is simply to early to state with certainty that Delta made a mistake buying the refinery.
 
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:47 pm

Quoting mayor (Reply 41):
I thought the point of the whole thing was for Trainer to produce jet fuel for DL's OWN operation at a lower price or, at least, with lower costs.

That would be unnecessarily expensive. If DL can sell its overrun locally for the same price it can buy fuel elsewhere, without having to ship the fuel to its other terminals, then it should take the profit from selling what it can't use at the end of the delivery pipeline, then buy locally elsewhere for the rest of the operation.
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:53 pm

Quoting jayunited (Reply 43):
Delta just came into the oil business (give them time to get their feet wet) while Exxon has been in the business for years so of course we all expect Exxon to make money.

And, again, we must restate that DL is NOT running the refinery, Monroe LLC, is. DL hired oil and refinery people to run the refinery because they're not as stupid as some on here seem to think they are. They KNEW that they couldn't operate a refinery by themselves.....they had to have people that were experienced in that field.
"A committee is a group of the unprepared, appointed by the unwilling, to do the unnecessary"----Fred Allen
 
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 5:56 pm

Quoting panamair (Reply 28):
Richard H. Anderson - CEO: More – actually – since we have actually closed on the refinery and spent a lot of time in the turnaround process, we have become more certain of how prudent that investment is for our Company.

That means little. When is the last time you heard a CEO say "well, we are still giving it a shot, but XYZ is a total disaster. We feel like boneheads. We are going to keep at it, however". It is standard for the company to stand behind decisions until there is a public announcement of a new direction. I cannot ever think of a time that a CEO said something is a failure, but we are still going ahead with it. That's a just a lawsuit waiting to happen.
 
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 6:11 pm

Quoting AeroWesty (Reply 44):
Quoting mayor (Reply 41):
I thought the point of the whole thing was for Trainer to produce jet fuel for DL's OWN operation at a lower price or, at least, with lower costs.

That would be unnecessarily expensive. If DL can sell its overrun locally for the same price it can buy fuel elsewhere, without having to ship the fuel to its other terminals, then it should take the profit from selling what it can't use at the end of the delivery pipeline, then buy locally elsewhere for the rest of the operation.

But that IS what the company has stated the purpose is. They have said that Trainer could provide 80% of DL's jet fuel needs.
"A committee is a group of the unprepared, appointed by the unwilling, to do the unnecessary"----Fred Allen
 
AeroWesty
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 6:25 pm

Quoting mayor (Reply 47):
They have said that Trainer could provide 80% of DL's jet fuel needs.

By volume, could very well be. Is DL going to ship fuel out from Trainer to SLC or other stations? Don't think so.
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hOMSaR
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RE: DL Losing Money In Refinery

Mon Feb 04, 2013 6:33 pm

Quoting wjcandee (Reply 42):
Yawn. Let's use an example of no relevance here.

If you assume that all markets operate efficiently at all times, you can make a lot of strategic mistakes.

One of Delta's stated perceptions was that the market was distorted, and that the refined product's price did not reflect drops in the price of the raw inputs. Choices made by refiners as to the quantity of various fuels that they chose to produce, and their ability to grab a higher crack spread on Jet A than might exist in an environment where refinery capacity was limited only by capital commitments and not by a host of other issues, like regulations, NIMBYs, etc., and the delivered-product market was not heavily-affected by transportation capacity and cost, had affected the price of this product to the airlines generally and to Delta specifically.

The observation that new refining capacity in this country has been minimal in the past X years is a statement only of a static fact, and I believe that it is an unreasonable deduction that no new capacity has come on only because it isn't "profitable" to be in the refining business. Fact is that there are lots of barriers to entry beyond the availability of capital and the profitability of refining, and it is also in the interest of the few refiners in the US to NOT increase capacity, as reflected in a growing crack spread on certain products.

By being in a position to control the decision as to what products are manufactured, where, and at what profit margin allows Delta to influence the overall market for Jet A, by allowing it, at a simplistic level, to introduce more competition. The CFO has also said that by adding just one more potential supplier of Jet A to the mix, they are able to cut deals with other suppliers that are more favorable than they have been able to make in the past.

This was a relatively-small investment that, assuming it can be operated near break-even, should turn out to be a good one.

What you say doesn't contradict what I said.

Whether it's apples or jet fuel, the economic principle is the same. If you can sell it on the open market for higher than its value to you, then economically, that's the best move to make.

In this case, it's the equivalent of me owning an apple tree causing the grocery store to lower its prices on apples. It slides the lines on the graph around a bit, but doesn't change the underlying principle behind it.

It goes back to the other point I made in my previous post:

Quoting hoMsar (Reply 34):
It depends on whether the losses (if there are any) from the refinery exceed the savings to Delta's fuel bill. If the refinery loses $1 but Delta saves $2 on fuel costs, then they come out ahead. If it loses $2 to save Delta $1, they are behind on the deal.
The plural of Airbus is Airbuses. Airbii is not a word, and doesn't even make sense.