The Philadelphia Energy Solutions refinery has suffered a massive explosion and fire in the early morning of June 21st. (Fortunately, there were only a few minor injuries.) Last week, the company, which filed for bankruptcy last year, has continued to face financial difficulties, saying it will not repair and reopen the facility in southern Philadelphia.
This marks a sudden end for the largest oil refinery in Northeast Europe. But that's good news for Delta Air Lines (NYSE: DAL) which holds one of the few remaining refineries in the region. (Several others have closed down over the last decade.) While other airlines may face higher fossil fuel prices due to the loss of refinery capacity, Monroe Energy's Delta subsidiary may see a good profit from higher margins refining.
Delta shocked observers seven years ago by buying a refinery in Trainer, Pennsylvania, which was recently closed by Phillips 66 . The total investment of Delta is about $ 250 million: $ 1
Many experts doubt that an airline can successfully operate a refinery that fights as part of a large refining company. However, Delta's management views the deal as a cheap, relatively low-risk way to protect itself from fluctuations in refining margins, which can sometimes increase the cost of jet fuel. Delta purchased a refinery in 2012 to hedge against unstable levels of refining. Image Source: Delta Air Lines
The Trainer refinery has mixed records under the ownership of Delta. Changes in the structure of the oil market and rising costs of complying with environmental protection have made the refinery less profitable than expected by the airline. (Already in 2012, Delta said the refinery would earn $ 300 million a year, almost reaching that figure in 2015, but it has not come close since.)
On the other hand, the refinery's possession has isolated Delta from increased margins for refining. during the breaks, as after Hurricane Harvey at the end of 2017. The refinery published operating income of $ 110 million in 2017 and $ 58 million in 2018 before moving to a loss of $ 34 million in the first quarter of 2019
East Coast Processing Margins skyrocketed a few cents after the explosion at the Philadelphia Energy Solutions refinery. Although there is a lot of infrastructure to move more refined products to the northeast by pipelines and ships, it is unlikely that the magnitude of refining margins in the region will completely disappear.
Furthermore, the Philadelphia Energy Solutions refinery did not have the ability to mix biofuels into its products, forcing it to buy renewable credits. The Delta coach is in the same position. With the phasing out of Philadelphia Energy Solutions, Monroe Energy's Delta division will face less competition to buy these renewable loans, which should reduce its costs.
The Trainer refineries process around 185,000 barrels of oil per day . That's almost 3 billion gallons a year. In this way, increasing the refining margins from just $ 0.04 per gallon will increase the annual operating profit of the refinery by more than $ 100 million, which is a significant amount.
This Will Help Delta Find a Partner
Last autumn, Delta is looking for a strategic partner to buy a share of the Trainer refinery. Given that it only needs jet fuel for the business of the airline – not all other products that the refinery produces – finding a partner to handle the rest of the refinery's production would make sense. managed to finish a deal. The company even researched the sale of a refinery entirely, according to Reuters – although chiefs have challenged this report.
Whether the sale or joint venture is the ultimate goal, the closure of the Philadelphia Energy Solutions refiners will help Delta. Potential partners (or buyers) who may have been nervous about the economy of the training facility may be inclined to look at now, thanks to a more favorable competitive landscape. Despite the increase and decline of the refinery over the years, Delta's bold move to enter the refining business is still on track to pay off in the long run.