- Delta suffered from a $63 million loss from the Trainer
refinery operations in 2012.
- But it anticipates that it will achieve $300 million in jet
fuel savings through the refinery in 2013.
- These savings compare to the $2.2 billion operating profit
that the carrier reported in 2012. Thus, these savings will
significantly increase Delta's margins in 2013.
) acquired the Trainer crude oil refining complex located near
Philadelphia from Phillips 66 in June 2012 for $180 million.
The carrier had hoped to address rising refining margins through
the acquisition, but the refinery produced a loss of $63 million in
2012. This loss was caused by Superstorm Sandy which not only
damaged Trainer's supply pipeline infrastructure but also lowered
its jet fuel production by impacting production start up.
Looking ahead, in the absence of any natural calamity, what will
be the impact of the Trainer refinery on Delta's profits?
In the first quarter of 2013, the refinery will likely provide
some marginal upside to the carrier's profits as the production of
jet fuel at the refinery has continued to increase. For the full
year 2013, the refinery will lower Delta's fuel expenses by around
$300 million. To provide context, Delta's operating income in
2012 was a little under $2.2 billion. Thus, fuel cost savings from
Trainer refinery operations will significantly expand Delta's
margins in 2013. These savings will also nearly recover the $330
million that Delta has so far invested in the Trainer facility to
bring it to production.
We currently have
a stock price estimate of $15.65 for Delta
, approximately 5% above its current market price.
See our complete analysis of Delta here
Delta aims to address rising refining margins through
Trainer refinery operations
Over the past few years, jet fuel refining margins have
increased, exacerbating the negative impact of higher crude oil
prices on airlines. Refining margin prices have risen to a high of
$45 per barrel in May 2008 before declining to $10 per barrel in
2009 and $14 per barrel in 2010 due to the financial crisis.
However, they rose again to $33 per barrel in 2011 and $36 per
barrel in 2012. Refining margins also increased as a percentage of
total fuel expenses for airlines during this period. For instance,
at Alaska Airlines, refining margins increased from 13% of total
fuel costs in 2009 to 25% of total fuel costs in 2012. Delta
is trying to address these rising refining margins in jet fuel
prices through the operation of its Trainer refinery.
Potential positive impact from Trainer refinery
operations in 2013
This refinery can process up to 185,000 barrels of crude oil per
day. In comparison, Delta consumed approximately 328,000
barrels of jet fuel per day in 2012. Currently, the carrier
expects to produce around 40,000 barrels of jet fuel per day from
the Trainer refinery by the end of 2013. The remaining
production from the refinery consists of gasoline, diesel and other
refined products, which the carrier exchanges for jet fuel from
Phillips 66 and BP under multi-year exchange agreements. In all, in
2013, Delta expects to save at least $2.20 per barrel of jet fuel
it consumes due to savings on refining margins from the refinery
Additional fuel cost savings can also be achieved if Delta can
source crude oil for the Trainer refinery from the Bakken oil field
in North Dakota. Currently, the carrier purchases crude oil for
this refinery from BP. Delta now also has flexibility in timing its
jet fuel purchases in a way that it incurs lower fuel prices. The
Trainer refinery has also provided the carrier with greater
leverage to purchase jet fuel from the market.
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