Done Deal -- $120M for Refinery

[WorldTraveler]

obviously I don't know the details other than what was made public... that is precisely what I meant when I said that it is necessary to know one's place in life, a statement that was misunderstood then but is still true.
This is a highly complex deal about which we don't and won't know the details. DL may or may not provide enough detailed information to be able to evaluate the effectiveness of what is done given that they have other ancillary businesses. There is obviously a certain amount of competitive advantage they want to retain - but since they report actual fuel costs, I think they will have to show the real benefit (or loss) of the deal at some point.
I still find it far-fetched to think that 3 multibillion dollar companies would come up with a deal that says "you turn that refinery thingy back on and we'll take whatever you have and we'll get you whatever we have... and if we all screw up w/ our numbers, we can just dump the rest into NY harbor since JP Morgan wants to know the price of jet fuel close to that important trading post - we'll all teach 'em"

We can wait on the victory declaration but if DL is right, their competitors will be scrambling to come up w/ alternative of their own.... and some simply won't be able to find one. And in the scope of a $10-12B fuel bill, the expense of running a refinery will be very small if they are wrong... at the worst, it seems likely they will have ended up w/ the same costs as they would have had before - and it then becomes an issue of controlling your own supply - which in and of itself is still an advantage.

 

[BoeingBoy]

obviously I don't know the details other than what was made public... that is precisely what I meant when I said that it is necessary to know one's place in life, a statement that was misunderstood then but is still true.

I'll admit that it's hard for many not to take that as a put-down. It means that you consider yourself above others since you freely dispense your optimistic opinions on any subject which even slightly touches on DL. So maybe you should consider taking your own advice...

We can wait on the victory declaration but if DL is right, their competitors will be scrambling to come up w/ alternative of their own.... and some simply won't be able to find one.

And I present the example of what I said above...

And in the scope of a $10-12B fuel bill, the expense of running a refinery will be very small if they are wrong... at the worst, it seems likely they will have ended up w/ the same costs as they would have had before - and it then becomes an issue of controlling your own supply - which in and of itself is still an advantage.

And another, except this time you leave something out. It's not merely the cost of running the refinery but also the cost of acquisition, improvements, and the delivered price of the crude that goes into it before anything comes out. From listening to Anderson on CNBC yesterday morning, it seemed like he was most optimistic about reducing the "crack spread" but that is what it is for a reason and the reason isn't just so the refinery operators can make more profit.

One thing is for sure - it'll be an interesting experiment to watch unfold if DL reports enough info to get an idea of how successful (or unsuccessful) it is. Just as interesting as watch the occassional RJ provider think that they can do better as an independent carrier flying RJ's or Bedford's experiment trying to be a mainline operator by buying Frontier/Midwest. But the history of airlines trying to "break the mold" has more failures than successes...

Jim

 

[WorldTraveler]

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I'm sorry if you or anyone else find it offensive that I would say that we all have our places in life and it is not within my or anyone else's ability to be an expert about multiple topics.
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Despite what you or others might want to believe, I speak authoritatively about a pretty narrow range of topics in the airline industry - it doesn't include most operational issues but it does include the business of the airline industry. I have demonstrated on this forum for close to a decade a pretty strong understanding of what makes airlines work and not work - my track record speaks for itself.
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I might also note that there is a pretty strong correlation between the number of red negative marks that appear next to my posts and how accurate I was on that particular subject as measured by the test of time. There is a lengthy thread that was full of predictions of how WN would take ATL by storm and inflict major damage to DL. Not only is WN/FL smaller today in ATL than FL was at several points in time in the past, but Gary Kelly made it clear that they will continue to pull down the FL system and rebuild it in the manner in which FL operates - all points I made a year ago but for which I received probably more red negative marks than any other post in which I've participated.
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I also predicted that the DL-NW merger would progress smoothly with DL remaining just as non-union as it was before the merger. Not something a lot of people on a pro-labor internet chat board wanted to hear but I was right.
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I have said for years that AA would end up where it is today because it failed to attack its basic problems while other carriers, including DL, came out of BK swinging and looking to grow their business at the expense of whoever came along. And now we have endless discussions about the virtue of an AA-US merger when it was clear for years that AA didn't turn the ship around and whether joined with US or not, the company has to make deep cuts if it wants to survive. That message isn't popular w/ anyone but it will be shown to be absolutely true - and the fact that the non-labor creditors are showing no interest in supporting a US takeover shows my position was on track years before anyone hear wanted to admit it - and I have no loyalties to either AA labor or mgmt. Business is business.
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I said when Kev teed up this topic that I could see the potential value in the deal but couldn't really know whether it would make sense financially, even though a host of "analysts" weighed in between when word of it broke and the final announcement saying the deal made no sense, even though they had no more information than you or I and had no specific experience in the petroleum industry or knowledge of the deal that was being proposed.
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More significantly, I made clear that DL's investment in the refinery amounts to a single digit fraction of what it spends on jet fuel so the notion that it could be a disaster is more than far-fetched. But I also was adamant that DL would bring in people and resources as partners in the deal, including to run the refinery, and I was absolutely right.
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I still don't know whether the deal will make sense or not - but it isn't hard to see looking at the facts that it will either be inconsequentially immaterial or it will provide a signfiicant competitive advantage. It is virtually impossible for DL to lose large amounts of money on the one hand but also very possible they could gain an advantage that other carriers do not have.
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The world will always be full of people who screw up whether in their own line of expertise or not. I personally know what I do well and stick well within that zone. My track record speaks to that.
But let's also be very clear that DL has overcome more than one obstacle which the outsiders thought it could not do - not the least of which was to emerge from BK, smoothly acquire NW while other airlines are still tripping over mergers, and decide that buying used orphan fleets instead of ordering tens of billions of dollars of new aircraft makes more sense.
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So, you and others can be skeptical if you would like. I would simply suggest that if you aren't pretty sure of the facts of a case, then speaking w/ such strength about what is possible and not possible might be more than a little dangerous.
I would also cite DL's track record in running a business that many airline managers wish they could emulate - in an industry full of paralyzingly bad labor relations, IT meltdowns that are top line news for weeks, and mergers that looked good on paper but never reach their potential.
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I believe time will demonstrate that this refinery deal turned out to be an advantage for DL and that those red negatives I earned here are just one more evidence that I made the right call contrary to what a lot of other people believed.
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And quite frankly I find it more than a little sad that people who can't accurately speak to key industry issues think that resorting to flipping little green or red buttons changes the outcome of the situation. What does it say about those who write post after post that end up being factually wrong but which ends up with lots of green marks while the people who get it right end up w/ red negative marks?

 

[BoeingBoy]

What does it say about those who write post after post that end up being factually wrong but which ends up with lots of green marks while the people who get it right end up w/ red negative marks?

That they don't like being talked down to by a self-described expert with an inflated ego??? Especially one who appears to pay more attention to those "meaningless" red and green buttons than claimed since he's taken the time to correlate the relationship between the number of red buttons clicked and the self-proclaimed accuracy of his posts???

Jim

 

[WorldTraveler]

I'm sorry but if people want to take on incorrect positions and then expect it to just slide under the rug, then I think it is they, not I, that are disconnected from reality.
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Can you tell me what other aspect of life (perhaps except politics) you can expect to spout off inaccurate information and not be called on it?

BTW, someone GRACIOUSLY gave me a green button! Maybe I'm joining the ranks of those for whom public approval and being inaccurate are directly related.
No, not interested.

 

[FWAAA]

Moody's says purchase of refinery is a credit negative:

http://www.reuters.com/article/2012/05/02/idUSWNA641120120502?feedType=RSS&feedName=marketsNews&rpc=43

 

[FWAAA]

Delta's risky oil refinery bet:

http://money.cnn.com/2012/05/01/news/companies/delta-refinery/index.htm?source=yahoo_quote

 

[southwind]

Nothing ventured................Nothing gained !

 

[WorldTraveler]

so DL has some convincing to do, that's not exactly a surprise and nothing I ever doubted. I'm also pretty certain DL counted the cost of their decision against the potential for adverse ratings given how few supporters DL found in the analyst community before the deal was announced. But it still doesn't say that the refinery won't do what DL intends to do - and as one article says it could well be that DL has the last laugh on alot of folks.
And it also says that people and organizations who know what they are doing move forward even against the cries of dissent from those around them.
(Do you detect that I respect a number of the cultural aspects in the way DL does business - and you might guess that I am not one to sit on the sidelines of life waiting for approval from others before deciding to move forward with my own life.)
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And I'm still not so sure where the huge risk comes... at worst, DL is no worse off as an intermediary producer and large consumer than they were as a large consumer before.
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I suspect S&P would have probably said that AA was taking an enormous risk by putting Sabre work stations on travel agent desks back in the day when AA invested a lot of cash to to do that.

 

[mistified]

My unbiased opinion is that someone here is VERY biased.
Again this is just my opinion.
Very entertaining to say the least!

mistified

 

[WorldTraveler]

Bias has nothing to do with the subject. Recognizing that this is a highly complex and unorthodox deal about which the vast majority of us know nothing of the details and can't really know whether it will work or not IS the issue - and in so doing, recognize that making blanket statements about what can or can't be done is highly subject to being proven wrong, which is exactly what has happened with statements about the capacity of the refinery to produce jet fuel.
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I STILL don't know whether the deal will work or not - but I do know that DL has enough favorable fuel hedges based on what they have reported so far to pay for the cost of restarting and converting the refinery. The notion that DL will lose enormously in the deal is just not supported by the fact that we are talking a couple hundred MILLION dollar investment that will be capitalized over multiple years compared to a fuel bill that is pushing $12 BILLION per year.
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I don't know if this means that DL will give up hedging when the refinery comes online - but since they have 80% of their domestic fuel needs accounted for in the refinery deal, I have a feeling that they may exit hedging... and no one I have read notes that if that occurs, DL's financial risk DIMINISHES. As much as everyone expected that US would be slammed by not hedging, they haven't had fuel prices that are dramatically higher than anyone else's... in fact UA and WN both had higher fuel prices in the most recent quarter than US... so perhaps the notion that hedging can solve the problem is wrong - and DL noted that there is no mechanism for hedging against the jet fuel crack spread relative to gasoline... which is why they will produce a high percentage of jet fuel and then swap the rest of the refinery's production.
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My point remains that I am pretty confident that any company that is plunking down one-quarter of a billion dollars on an investment and has two global oil companies for partners in the deal has thought through what is going on a whole lot more than some analysts on Wall Street or internet chat participants who only see that a company is coloring outside of the box and then reach for the ruler to slap their hand, just like their kindergarten teacher did to them.

 

[BoeingBoy]

which is exactly what has happened with statements about the capacity of the refinery to produce jet fuel.

I must have overslept. Didn't know that Trainer was producing 52K barrels of jet fuel a day yet...

But since you said that, I'll remember that that is the number you've now claiming is fact and staking any reputation you think you have on. We'll see who's right by the end of the year. Even if DL doesn't report it in it's quarterly/annual filings, the EIA or Platts will know...

Ya see, I have absolutely no problem with being wrong - been there before and undoubtedly will be again. But I've never claimed to have a lock on the "truth" as some have...

Jim

 

[UPNAWAY]

Since Jet A is fungible won't any benefit be spread over the entire industry? My guess in the long run the only direct DAL benefits may be tax write offs.

 

[BoeingBoy]

Since Jet A is fungible won't any benefit be spread over the entire industry? My guess in the long run the only direct DAL benefits may be tax write offs.

The theory is that DL will be able to produce a significant part of it's own jet A cheaper, and exchange other products that the refinery produces cheaper for jet A (effectively making that cheaper too). But a theory in another area says faster than light travel is possible. Sometimes theories sound good but aren't achievable, either because they're not possible with the technology available or the theory is wrong - and even Einstein and Hawkins each admitted one of their theories was wrong.

Jim

 

[WorldTraveler]

I didn't claim the 52K is a fact... I've simply said that I am willing to trust a company that is spending $250M on a refinery in a deal partnered with two global oil companies if they say the refinery can be converted to produce 52K bbl of jet fuel quite a bit more than someone who has no specific information on the refinery in question or experience in the refinery industry.
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I do hope we reevaluate the topic... I am all about reviewing statements that members have been made to determine if they were right or not. I commend you for being willing to submit your opinions to the scrutiny of history; not everyone is as willing and many would rather not see what they wrote be revisited. Few people in reality admit they were wrong - as I have done about my predicitions of UA's failure in their very lengthy BK.
What I have written is an open book and like you, I hope we do evaluate whether this deal works or not.
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Yes, DL's reopening this refinery is a boon for all jet fuel users because DL is adding new fuel to the market which it otherwise would consume. DL's benefit would presumably come because the production from that plant is close to its major NE operations and thus if the economics of the refinery work, DL will have a cost advantage compared to its peers who will be buying fuel predominantly refined on the gulf coast.
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It still appears that alot of people are missing the fact that CP as the former operator of this refinery were not focused on producing exclusively jet fuel. They were interested in generating the maximum amount of revenue and they could play with the mix of products (within the capabilities of the refinery and the limits of the source crude oil). DL is interested in operating the refinery at break even costs; the oil companies needed to see a profit. DL's interest in the deal is because it is focusing on one product whose demand is faster than the demand for gasoline - which is the majority of what most refineries produce - and that is based on global structural issues that DL believes will not change. DL also notes that it cannot hedge for that difference in price - the jet fuel crack spread - which is why US has not been much worse off not hedging than other airlines who have. Thus, DL's decision is to move to another strategy that they believe will provide control and cost savings based on being the world's largest purchaser of jet fuel, according to several reports - and they are specifically targeting the location and size of the refinery to their specific needs. Other refineries in other locations would not deliver the same results.