Delta May Acquire Oil Refinery - Analyst Blog

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The second largest U.S. airline, Delta Air Lines ( DAL ) is considering to buy an oil refinery in Pennsylvania. The company is expected to bid up to $150 million to acquire ConocoPhillips ' ( COP ) Traineroil refinery. 

Given the continued rise in fuel prices, Delta Air Lines expects this strategy to lower its fuel cost burden to a large extent. However, many oil refineries in the U.S. are struggling to generate profitable business given rising crude prices that weighed over their margins. As a result, selling or closing refineries have become a trend in the U.S. in order to boost profitability and improve margin. Last year, one of the biggest oil refining companies in the U.S. Sunoco, Inc. ( SUN ) disclosed its plans to shut down its refineries in Marcus Hook and South Philadelphia if it fails to seek buyers by July this year.

ConocoPhillips remains no exception in this weak market position. In September 2011, the company already announced its plans to either close down or sell its Pennsylvania based refinery. All these facts indicate that generating any meaning full synergy from this deal would pose a significant challenge to Delta amid a weak profitability outlook for the U.S. airline industry.

The bidding timeline is yet to be disclosed by Delta but ConocoPhillip has already announced that it would extend its timeline till May to sell its oil refinery.

Apart from the refinery buyout plan, Delta Air Lines is taking several initiatives to lower its overall cost including fuel price. The company is successfully passing the increased fuel costs to customers in the form of fare hikes. Another way of reducing fuel cost is by cutting capacity. Delta is planning cautiously on capacity cuts. Capacity is expected to be down 3-5% year over year in the first quarter, with 2-4% reduction in domestic capacity and 4-6% international capacity.

For 2012, the company intends to slash its capacity 2-3% year over year with domestic cuts of 1-3%. In the trans-Atlantic route, Delta along with its partners, Air France KLM and Alitalia, will reduce capacity by 7-8% in 2012. Latin America capacity is expected to grow up to 2% on the back of moderate demand in Brazil and Central America. Pacific capacity would grow by 1-2% year over year.

Additionally, Delta Air Lines is involved in fuel hedging strategies, which provide a cushion to the rising fuel prices. Delta Air Lines is 66% hedged for the first quarter at jet fuel price from $3-$3.25 per gallon and 58% hedged for the second quarter at a jet fuel price between $2.75 and $3.25 per gallon using collars and call spreads.

However, new advertising rules, competitive threats from United Continental Holdings Inc. ( UAL ), Southwest Airlines Co. ( LUV ) and JetBlue Airways Corp. ( JBLU ), its unionized workforce and heavy investments, might weigh on the bottom line.

Consequently, we are maintaining our long-term Neutral recommendation on the stock. For the short term (1-3 months), Delta Air Lines retains a Zacks #4 (Sell) Rank.


 
CONOCOPHILLIPS ( COP ): Free Stock Analysis Report
 
DELTA AIR LINES ( DAL ): Free Stock Analysis Report
 
JETBLUE AIRWAYS ( JBLU ): Free Stock Analysis Report
 
SOUTHWEST AIR ( LUV ): Free Stock Analysis Report
 
SUNOCO INC ( SUN ): Free Stock Analysis Report
 
UNITED CONT HLD (UAL): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: COP , DAL , JBLU , LUV , SUN

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