Delta is Looking to Refine its Business Model
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As a shareholder of ConocoPhillips (NYSE: COP), I’ve been following the rumors of the potential sale of their idled Trainer PA refinery to Delta Air Lines (NYSE: DAL). I’ve written about my less than enthusiastic views on the refinery industry and I’m not a big fan of the airlines either. However, the more I think about this deal it makes me wonder if two negatives might just be a positive.
According to reports Delta will buy the 185,000 barrel per day refinery for around $100 million while JP Morgan Chase & Co. (NYSE: JPM) would secure and finance the supplies and sell Delta the jet fuel at wholesale and then sell the other refined products into the market. In addition, according to reports on CNBC, Delta and Conoco will enter into a swap agreement where Delta will swap some of the gasoline they produce for jet fuel produced by Conoco. With the rising price of oil and its derivatives like jet fuel, it makes it ever more difficult for airlines to remain consistently profitable. For years the airlines have been trying to hedge the costs but if Delta can prove that moving down the value chain is a better hedging mechanism, they can gain a competitive advantage over their industry peers. Delta is looking for this deal to shave 10 percent of their fuel costs in their New York hubs, which is substantial.
For ConocoPhillips this deal would be a real coup for their soon to be spun off Phillips 66 subsidiary. They’ve publicly stated their desire to reduce the refinery side of the new Phillips 66 and this would be a great first step. This particular refinery was idled in September due to the market pressures from imports, costly regulatory requirements and weakness in gasoline demand. Phillips 66 will be relying less on refining going forward because the returns on capital employed are not as high as their midstream and chemical businesses. In the rumored deal with Delta they are able to cash out of a non-performing asset and could potentially find other similar deals with Delta’s airline peers if they see the competitive landscape change.
I continue to like ConocoPhillips and hope that Phillips 66 will continue divesting refinery assets so they can grow their chemicals business, which I like the most. I’ll also be watching Delta going forward to see if they are able to make a dent in their fuel costs. If more value-realizing relationships can be developed on the refining side, especially as we produce more oil here in the states, then its possible there is more value in the refining assets than I currently see.
The Motley Fool owns shares of JPMorgan Chase & Co. latimerburned owns shares of ConocoPhillips. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.