A Refiner's Opinion on Delta Refining | RefinerLink
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A Refiner's Opinion on Delta Refining

By Steve Pagani

May 09, 2012
 

Delta’s acquisition of the Trainer Refinery from Phillips 66 may prove to be one of the best decisions the airline has ever made, or not. But one thing is for sure; it’s given a lot people in Pennsylvania hope.                        

 
 

Say it with me “Delta Refining, Delta Refining, Delta Refining” it actually has a pretty cool little ring to it. It also has some interesting connotations. While I’m not sure if it’s the best idea, I believe there are some serious merits to the adventure. The proof will definitely be in the earnings, Wall Street will either punish or reward.

 

“Delta” is the mathematical symbol for change. Could this be a turning point for the fuels refining business? It’s starting to look that way with more international refining competition. International competition that is not hamstrung by unions, US regulations, or even fair trade concerns (NOCs).

 

Another interesting idea is the pure factor of Delta (an airline company) jumping into the refining business to minimize its key fuel expense. Lets be clear, Delta isn’t the first one to try this. It all started back with John D. Rockefeller fueling the rail industry. The refining/energy business has been a fully integrated model in the past. Discover crude, refine it, and sell the products to the customers. In the past it’s stopped there, now Delta’s taking that integration a step further, instead of crude to customer (stopping at the gas pump) they are taking it crude to customer (stopping at the baggage claim).

 

 

Delta is an engineering and safety company

 

First off, lets remember, Delta is an engineering and safety company. While they may not build the airplanes they fly all over the place. They are responsible for making sure they take off and land every day, which requires engineering and safety skills with zero room for error. Running a refinery is very similar in that regard. Operating a refinery safely everyday can go a long way in pushing a refinery to the black. Just ask BP how economic their refineries are when they catch on fire every few years, which has a lot do with why they are selling many of them.


 

Delta is a commercially savvy company  

 

Another good thing Delta has going for it is that it’s a commercially savvy company. For years they’ve had to understand ways to manage their fuel cost risk. They’ve probably done this through financial instruments such as hedging and forwards contracts.  Delta has always had to negotiate with the refining companies for fuel contracts. Now, they’ll have both sides of the playbook. For years, refiners have shied away from financial instruments. Remember, the folks that run refining companies have historically been engineers.  They may have been the smartest guys in the room when it came to VLE equations, but they may never have opened a book on technical stock analysis or financial methods to manage financial risk. In this category, Delta’s experiences may actually make it more competitive than the historical refining company. 

 

If the news reports are correct about the terms of the supply and products deal, Delta in essence will convert all of it’s Trainer refinery crude yield to jet; either through actual jet yield off the Trainer crude slate or by swapping the Trainer gasoline and diesel yields for more jet from other Phillips 66 and BP refineries.  The devil is in the details as to if this will really work out in Delta’s favor.

 

 

Delta is a logistics and optimization company 

 

Delta is a logistics and optimization company.  In order for Delta to be profitable they must manage hundreds of flights each day. In order to do this they must get fuel, people, bags, and supplies from A to B at the lowest cost possible.  Much like a refinery, Delta’s control of Opex is critical.  For an industry that’s been operating in the margins for a long time, one would assume they’ve got Opex control down to a science an area where most refineries could use some improvement.

 

All in all, there are quite a few areas where Delta’s corporate experience may actually help improve Trainer’s bottom-line.  In my opinion its pretty naive to think that if Conoco, Phillips 66, BP, Sunoco, or even Exxon aren’t turning a profit in a particular refinery it doesn’t mean someone else can’t. Maybe its time for a lot of refiners to re-read Who Moved My Cheese?

 

 
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