The refinery of Philadelphia Energy Solutions suffered a massive explosion and fire in the early morning of June 21. (Fortunately, there were only a handful of minor injuries.) Last week, the company – which filed for and filed for bankruptcy last year – filed for bankruptcy and continued to face financial difficulties – announced it would not repair the plant in South Philadelphia and to reopen.
This marks a sudden end to the largest oil refinery in the northeast. But it's good news for Delta Air Lines (NYSE: DAL) which owns one of the few remaining refineries in the area. (Several others have closed in the last decade.) While other airlines may face higher jet fuel prices due to the loss of refinery capacity, Delta's Monroe Energy subsidiary could see a significant increase in profits due to higher refining margins.
Delta's Unusual Investment
Seven years ago, Delta shocked the observers with the purchase of a refinery in Coach, Pennsylvania, which had recently been closed by Phillips 66 . Delta's total investment was approximately $ 250 million: $ 1
Many experts doubted that an airline could successfully operate a refinery that had problems as part of a large refinery. However, delta management saw the deal as a cheap, relatively low-risk method of protecting against fluctuations in the amount of refineries, which can sometimes increase the price of jet fuel.
The coaching refinery was under deltas Leadership a Mixed Success Story Changes in the structure of the oil market and rising costs of environmental compliance have made the refinery less profitable than projected by the airline. (In 2012, Delta announced that the refinery would earn $ 300 million annually It would have almost reached that figure in 2015, but has not nearly reached it since.)
On the other hand, the Delta refinery has been insulated from increased refining margins. The refinery achieved operating profits of $ 110 million in 2017 and a loss of $ 58 million before posting a loss of $ 34 million in the first quarter of 2019.
Refinery Economy Improved
Following the explosion at the Philadelphia Energy Solutions refinery, refining margins on the East Coast rose by several cents. While there is sufficient infrastructure to relocate more sophisticated products by pipeline and ship to the Northeast, it is unlikely that the increase in refining margins in the region will soon disappear.
In addition, the refinery of Philadelphia Energy Solutions was unable to mix biofuels in its products, forcing it to purchase renewable credits instead. Delta's trainer facility is in the same position. With the closure of Philadelphia Energy Solutions, Delta's Monroe Energy unit will be less concerned with buying these renewable credits, which should lower its costs.
The refinery coach processes about 185,000 barrels of oil daily. That's nearly 3 billion gallons a year. An increase in refining margins of just $ 0.04 per gallon would increase the refinery's annual operating profit by more than $ 100 million, a significant sum.
Will this help Delta find a partner?
Since last fall, Delta has been looking for a strategic partner to acquire a stake in the coaching refinery. Since it only needs jet fuel for its airline – not for all the other products the refinery produces – it would make sense to find a partner to take care of the rest of the refinery production.
Delta has not done so far was able to conclude a deal. According to Reuters, the company even contemplated the full sale of the refinery – although executives have denied this report.
Whether a sale or a joint venture is the ultimate goal, the closure of the Philadelphia Energy Solutions Delta refinery will help. Potential partners (or buyers) who have thought about the economics of the coaching facility may be willing to take a fresh look at it because of the more favorable competitive environment. Despite the ups and downs of the refinery over the years, Delta's bold move to enter the refinery business is still on track in the long term.