Possible Delta Air Lines refinery acquisition raises eyebrows

Analysts have been stunned by reports that Delta Air Lines is considering the purchase of an idled ConocoPhillips refinery on the US east coast. The unprecedented deal would provide Delta with an in-house source of jet fuel, but the problems inherent in such an acquisition would outweigh any benefits, experts say

The Wall Street Journal, among other media outlets, reported last week that Delta Air Lines was in talks with ConocoPhillips to buy the facility in Trainer, Pennsylvania. Citing anonymous sources, the Journal said that Delta was considering a bid of between $100 million and $150 million and that it would hire an outside firm to manage the refinery, with an eye towards using its jet fuel production while swapping its other output with a partner. The 185,000 barrel per day (bpd) refinery outside of Philadephia produces around 23,000 bpd of jet fuel, according to the US Energy Information Administration.

On Wednesday, CNBC reported that Delta's proposed partner in the deal is JP Morgan, whose commodities team would handle crude oil supply as well as the offtake of products other than jet fuel.

In theory, such a move would provide Delta with a steady new source of jet fuel not far from John F Kennedy International Airport in New York City, a major hub for the carrier. Delta, like other airlines, has been suffering from lofty prices for aviation fuel recently. The International Air Transport Association says the average global price of jet fuel has reached $139 per barrel, up 2.9% from the same time last year.

Still, industry observers are sceptical about the potential value of the deal. "It's a potential disaster," says Mike Corley, president of Mercatus Energy Advisors, a Houston-based consultancy that advises companies on fuel hedging. "These are two of the most challenging industries in the world. Combining two challenging industries does not equal a less challenging industry."

Even if Delta can find suitable partners to manage the Trainer refinery and offtake its output of gasoline, diesel and other products, both the airline and the refinery would still be exposed to crude oil prices, which makes the acquisition a dubious hedge, he points out. Corley says he is mystified by the reports and has not yet heard a strong case for why Delta should get into the refining business. "I've spoken to maybe a dozen people, all experts in the airline and refining industries, about this since the story broke, and I haven't heard a compelling argument from anyone," he says.

Refineries on the US east coast, which get their feedstock from seaborne sources with prices linked to Brent North Sea crude rather than cheaper North American sources, have been struggling to stay in business. The Trainer refinery, along with two others in the Philadelphia area, was put up for sale last year, while its owner, ConocoPhillips, is in the process of splitting into two companies, one focusing on refining and one on the more lucrative business of exploration and production.

That makes it hard to understand why Delta would want to acquire such an asset, analysts say. "Because they're generating a lot of cash and they're very profitable, they have more options available to them than other airlines," says Helane Becker, an airline analyst with Dahlman Rose & Company, a boutique investment bank in New York. "That said, I don't think owning a refinery would be considered the company's core competency."

A Delta spokesman declined to comment for this article. A spokesman for ConocoPhillips declined to comment as well, but added: "We are continuing our efforts to find a buyer for the Trainer refinery." JP Morgan could not immediately be reached for comment.