Delta Airlines Acquisition of Trainer Refinery

Delta Airlines Acquisition of Trainer Oil Refinery

On April 30th, Delta Airlines announced its intention to acquire Trainer Oil Refinery in Pennsylvania via a subsidiary, Monroe Energy LLC for $150 million. Delta CEO, Richard Anderson called the move "an innovative approach to managing our largest expense", estimating post-acquisition savings in jet fuel costs to be as much as $300 million per year. Delta will spend a further $100 million in turnaround costs which will allow them to maximise jet fuel production at the facility. The State of Pennsylvania will also contribute $30 million to the deal in exchange for a commitment to keep the refinery operational (previous owner ConocoPhillips had shut-down the facility in October last year).

Richard Anderson further explained the company's rationale, citing "going after" the jet crack spread (the difference between the price of crude oil and jet fuel) as their principal motivation. It appears that Delta view the rising jet crack spread as both a risk against which they are unable to effectively hedge, and a margin opportunity. Whilst the Trainer Refinery alone has nowhere near enough capacity to satisfy Delta's total demand for jet fuel, they have entered in to strategic partnerships with BP and Phillips 66 to exchange the non-jet fuel refined products they produce for more jet fuel. In total, the deal should be able to provide around 80% of Delta's domestic-use jet fuel.

Much of the early media coverage agreed with Richard Anderson's analysis and Delta stock rose steadily from $10.90 on April 30th to a three month high of $11.52 on May 14th. Whilst at first glance this appears to support the view that the acquisition is a smart move, closer inspection shows that Delta stock has failed to out-perform competitors over the last quarter; Delta stock has followed a similar trajectory to that of United Continental Holdings, whilst US Airways has out-performed both.

Whilst Delta's claims that the acquisition will allow jet fuel savings of $300 million per year, it is unclear how this will be achieved. The Trainer Refinery was shut down by ConocoPhillips precisely because it was one of the least profitable in the United States. Chief Financial Officer, Jeff Sheets, was very clear about this in his third-quarter earnings call last year: "The Trainer Refinery was not producing net income," he explained. "The cash generation was also not very strong. We were at a point where we were having to decide about timing on turnaround costs and future capital expenditures, which had a lot to do with the timing of the decision to shut it down in October." If the refinery was unprofitable