Delta to Buy Refinery in Effort to Lower Jet-Fuel Costs .# Stock
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http://online.wsj.com/article/SB1000142405270230405030457737635
By SUSAN CAREY And ANGEL GONZALEZ
Delta Air Lines Inc. DAL +1.29%said Monday that it reached an agreement to
buy a refinery complex near Philadelphia in a bid to cut the carrier's
yearly jet-fuel costs by $300 million.
The nation's second-largest airline by traffic, after United Continental
Holdings Inc., said it will purchase the Trainer, Pa., complex from Phillips
66, a refining and marketing business that will be spun off from
ConocoPhillips on Tuesday.
Under the deal, Atlanta-based Delta would become the first U.S. carrier to
buy a refinery. The airline intends to invest $150 million to acquire the
complex, and expects to receive $30 million in Pennsylvania state-government
aid to help preserve jobs at the site. The company plans to spend a further
$100 million to retrofit the plant to maximize its ability to produce jet
fuel, and will enter marketing and sourcing pacts with Phillips 66 and
London-based energy company BP PLC. BP.LN -0.30%
Meanwhile, Sunoco Inc. on Monday reiterated its pursuit of a deal that would
give private-equity firm Carlyle Group LP operating control of its aging
Philadelphia refining complex, even after Energy Transfer Partners LP agreed
to pay $5.3 billion for Sunoco. People familiar with the Sunoco-Carlyle
talks put the likelihood of a deal happening at less than 50% and said
success depends on Carlyle's ability to find a way to efficiently move crude
oil from North Dakota's Bakken Shale fields to Philadelphia.
Delta said production from the Trainer refinery, as well as agreements to
exchange gasoline, diesel and other refined products for jet fuel elsewhere,
will provide 80% of the airline's jet-fuel needs in the U.S.
"Acquiring the Trainer refinery is an innovative approach to managing our
largest expense," Delta Chief Executive Richard Anderson said in a written
statement. "This modest investment, the equivalent of the list price of a
new widebody aircraft, will allow Delta to reduce its fuel expense by $300
million annually and ensure jet fuel availability in the Northeast."
Delta said that under a three-year agreement BP will supply the crude oil to
be refined at the facility, which was idled last year and has been up for
sale. Delta will exchange gasoline and other refined products from the
complex for jet fuel from Phillips 66 and BP elsewhere in the U.S. through
multiyear agreements. The refinery will be run by a leadership team led by
25-year industry veteran Jeffrey Warmann, who in his last position as a
refinery manager for Murphy Oil USA Inc., restructured that company's Meraux
, La., refinery.
Delta said it expects to close the deal in the first half of this year, with
jet-fuel production likely to begin during the third quarter. Delta expects
2012 fuel savings of at least $100 million.
In 2011, Delta spent $11.7 billion on fuel, which amounted to 36% of its
operating costs. The previous year, when the tab was $2.8 billion lower,
fuel consumed 30% of Delta's expenses.
The airline's unorthodox acquisition underscores the dramatic transformation
experienced by the refining sector in the past decade. Refiners are
struggling to adjust to waning demand for motor fuels in the U.S., and the
rising cost of crude oil.
The refining business once was dominated by integrated oil companies such as
ConocoPhillips, which both produced the oil and refined and sold the output
. But as refining and marketing became less profitable than exploration and
production, some big oil companies began selling or idling refineries.
ConocoPhillips said in July that it planned to spin off its refining and
distribution arm. Shares in Phillips 66, which will become one of the
largest independent refiners in the U.S., are to begin trading on the New
York Stock Exchange on Tuesday.
By acquiring the Trainer facility, Delta is jumping into a particularly
challenged market. Refining profits on the U.S. East Coast are poor because
the fuel produced there has to compete with European imports and because
those refiners have to pay more for their oil than those located in the
interior of the U.S., where they have ready access to booming oil production
from Texas and North Dakota.
Pennsylvania Gov. Tom Corbett, in a written statement Monday, said the
agreement "means the preservation of more than 5,000 jobs at the Trainer
facility and in related industries." Gov. Corbett said he has been working
with ConocoPhillips, Delta and members of his cabinet "for several months"
on the deal. "It is a great honor to welcome Delta to Pennsylvania and wish
them great success in this new partnership," he said.
Delta said it expects the Trainer refinery to be accretive to the airline's
earnings and help the company expand its margins, said Paul Jacobson, Delta'
s chief financial officer. The carrier also expects to fully recover its
investment in the first year of operations.
Located along the Delaware River, about 10 miles southwest of downtown
Philadelphia, the refinery has a crude-oil processing capacity of 185,000
barrels a day. The facility has dedicated pipelines to the New York City
area, where Delta has operations at John F. Kennedy International Airport
and LaGuardia Airport.
By SUSAN CAREY And ANGEL GONZALEZ
Delta Air Lines Inc. DAL +1.29%said Monday that it reached an agreement to
buy a refinery complex near Philadelphia in a bid to cut the carrier's
yearly jet-fuel costs by $300 million.
The nation's second-largest airline by traffic, after United Continental
Holdings Inc., said it will purchase the Trainer, Pa., complex from Phillips
66, a refining and marketing business that will be spun off from
ConocoPhillips on Tuesday.
Under the deal, Atlanta-based Delta would become the first U.S. carrier to
buy a refinery. The airline intends to invest $150 million to acquire the
complex, and expects to receive $30 million in Pennsylvania state-government
aid to help preserve jobs at the site. The company plans to spend a further
$100 million to retrofit the plant to maximize its ability to produce jet
fuel, and will enter marketing and sourcing pacts with Phillips 66 and
London-based energy company BP PLC. BP.LN -0.30%
Meanwhile, Sunoco Inc. on Monday reiterated its pursuit of a deal that would
give private-equity firm Carlyle Group LP operating control of its aging
Philadelphia refining complex, even after Energy Transfer Partners LP agreed
to pay $5.3 billion for Sunoco. People familiar with the Sunoco-Carlyle
talks put the likelihood of a deal happening at less than 50% and said
success depends on Carlyle's ability to find a way to efficiently move crude
oil from North Dakota's Bakken Shale fields to Philadelphia.
Delta said production from the Trainer refinery, as well as agreements to
exchange gasoline, diesel and other refined products for jet fuel elsewhere,
will provide 80% of the airline's jet-fuel needs in the U.S.
"Acquiring the Trainer refinery is an innovative approach to managing our
largest expense," Delta Chief Executive Richard Anderson said in a written
statement. "This modest investment, the equivalent of the list price of a
new widebody aircraft, will allow Delta to reduce its fuel expense by $300
million annually and ensure jet fuel availability in the Northeast."
Delta said that under a three-year agreement BP will supply the crude oil to
be refined at the facility, which was idled last year and has been up for
sale. Delta will exchange gasoline and other refined products from the
complex for jet fuel from Phillips 66 and BP elsewhere in the U.S. through
multiyear agreements. The refinery will be run by a leadership team led by
25-year industry veteran Jeffrey Warmann, who in his last position as a
refinery manager for Murphy Oil USA Inc., restructured that company's Meraux
, La., refinery.
Delta said it expects to close the deal in the first half of this year, with
jet-fuel production likely to begin during the third quarter. Delta expects
2012 fuel savings of at least $100 million.
In 2011, Delta spent $11.7 billion on fuel, which amounted to 36% of its
operating costs. The previous year, when the tab was $2.8 billion lower,
fuel consumed 30% of Delta's expenses.
The airline's unorthodox acquisition underscores the dramatic transformation
experienced by the refining sector in the past decade. Refiners are
struggling to adjust to waning demand for motor fuels in the U.S., and the
rising cost of crude oil.
The refining business once was dominated by integrated oil companies such as
ConocoPhillips, which both produced the oil and refined and sold the output
. But as refining and marketing became less profitable than exploration and
production, some big oil companies began selling or idling refineries.
ConocoPhillips said in July that it planned to spin off its refining and
distribution arm. Shares in Phillips 66, which will become one of the
largest independent refiners in the U.S., are to begin trading on the New
York Stock Exchange on Tuesday.
By acquiring the Trainer facility, Delta is jumping into a particularly
challenged market. Refining profits on the U.S. East Coast are poor because
the fuel produced there has to compete with European imports and because
those refiners have to pay more for their oil than those located in the
interior of the U.S., where they have ready access to booming oil production
from Texas and North Dakota.
Pennsylvania Gov. Tom Corbett, in a written statement Monday, said the
agreement "means the preservation of more than 5,000 jobs at the Trainer
facility and in related industries." Gov. Corbett said he has been working
with ConocoPhillips, Delta and members of his cabinet "for several months"
on the deal. "It is a great honor to welcome Delta to Pennsylvania and wish
them great success in this new partnership," he said.
Delta said it expects the Trainer refinery to be accretive to the airline's
earnings and help the company expand its margins, said Paul Jacobson, Delta'
s chief financial officer. The carrier also expects to fully recover its
investment in the first year of operations.
Located along the Delaware River, about 10 miles southwest of downtown
Philadelphia, the refinery has a crude-oil processing capacity of 185,000
barrels a day. The facility has dedicated pipelines to the New York City
area, where Delta has operations at John F. Kennedy International Airport
and LaGuardia Airport.
