Delta expects refinery to make money next year

Posted: December 13, 2013

Delta Air Lines, which bought the former ConocoPhillips refinery in Trainer, Delaware County, to secure a steady source of discounted jet fuel, said Wednesday the refinery lost $100,000 in 2013, but is expected to be profitable next year.

Although some analysts had expressed skepticism about an airline diversifying into oil refining, a capital-intensive business with low margins, Delta president Edward Bastian told investors Wednesday: "Let me be very clear. Trainer has been a great success for Delta. We are pleased that we made that acquisition."

Speaking at the company's annual investor day in New York, Bastian said the refinery's production of 180,000 barrels a day had "an immediate impact" in lowering market jet fuel prices, particularly in the New York area.

Delta's wholly owned subsidiary, Monroe Energy L.L.C., operates the refinery in agreement with BP and Phillips 66. BP is responsible for locating crude oil supplies, and Phillips 66, an affiliate of ConocoPhillips, markets other fuels produced at the refinery, such as gasoline, heating oil, and diesel.

The Trainer refinery, which had a $3 million quarterly profit in the three months ended Sept. 30, supplies Delta's Northeast operations. Jet fuel is transported by pipeline and barge to airports, including Boston's Logan and New York's LaGuardia and John F. Kennedy.

Fuel is the largest and most volatile expense for airlines. Delta said the initial benefit of the refinery has been to lower market jet fuel prices and reduce Delta's total fuel expense.

"Historically, jet fuel has traded at a two-cent to three-cent premium over diesel," its closest peer, Bastian said. In 2013, jet fuel has been trading at a five-cent- to 10-cent-per-gallon discount relative to diesel, he said.

"For Delta, every penny that we save on fuel saves us about $40 million a year. When you do that math, it's considerable, and it's well worth the $150 million capital investment that we made in the refinery."

Airlines can "hedge" the cost of oil by entering into long-term futures contracts. But they cannot hedge the "crack spread," or the refiners' profit margin - the difference between the cost of crude oil and the selling price of jet fuel - which fluctuates based on supply, demand, and market trends.

The Trainer refinery next year will receive 70,000 barrels a day of lower-cost domestic crude, mostly from the Bakken region in the upper Midwest, compared with 17,000 barrels a day in 2013. The shift to cheaper crude will lower the average crude cost by $2 to $3 per barrel, the company said.

"We process 180,000 barrels a day, 365 days a year, times $2 to $3. You can do the math and see it's a material sum of money in opportunities yet to be attained," Bastian said.

To bring Trainer to profitability in 2014, Delta is making infrastructure changes to increase refined production, and boost jet and diesel production to 40 percent of the refinery's total output in 2014.

"When we complete the turnaround in February, we will have about 40 percent of our production in either diesel or jet fuel, which are by far the highest-value products that we produce," Bastian said.


lloyd@phillynews.com

215-854-2831

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