Philadelphia Energy Solutions refinery suffered a massive explosion and fire early in the morning of 21 June. (Fortunately, there were only a handful of minor injuries.) Last week, the company – which filed for bankruptcy last year and continued to face financial difficulties – announced that it would not repair and restore the South Philadelphia facility.
This marks a sudden end to the largest oil refinery in the northeast. But it is good news for Delta Air Lines (NYSE: DAL) who owns one of the few remaining refineries in the region. (Several others have closed over the past decade.) While other airlines may get higher jet prices due to a loss of refinery capacity, Delta's Monroe Energy subsidiary may see a fine rise in profits from higher refining margins.
Delta's Unusual Investment
Seven years ago, Delta shocked observers by buying a Trainer, Pennsylvania Refinery recently shuttered by Phillips 66 . Delta's total investment was around $ 250 million: $ 1
Many pundits doubted that an airline could succeed in operating a refinery that was worn as part of a larger refining company. The Delta management, however, saw the deal as a cheap, relatively low-risk way of protecting itself against fluctuations in refining margins that can drive up the price of jet fuels at times.
The Trainer refinery has had a mixed Track record during Delta's ownership Changes in the oil market structure and increasing environmental compliance costs have made the refinery less profitable than the airline had projected. (Back in 2012, Delta said the refinery would earn $ 300 million annually. It hit nearly the number in 2015, However, owning the refinery has isolated Delta from elevated refining margins during periods of disruption, as after Hurricane Harvey at the end of 2017. The refinery had revenues of $ 110 million in 2017 and $ 58 million in 2018 , before fluctuating to a $ 34 million loss in the first quarter of 2019.
Refinery economy just improved
Refining East Coast argins bounced off several cents after the explosion at the Philadelphia Energy Solutions refinery. While there is plenty of infrastructure to move more refined products to the Northeast via pipeline and ship, inflation in the refining margins in the region is unlikely to disappear at any time.
Also, the ability to interfere in the Philadelphia Energy Solutions refinery biofuel was missing in its products, forcing it to buy renewable credits instead. Join the Trainer's facility in the same position. With Philadelphia Energy Solutions closing, Delta's Monroe Energy unit will face less competition to buy these renewable credits, reducing costs.
The Trainer refinery processes about 185,000 barrels of oil per day. It goes to almost 3 billion liters a year. An increase in refining margins of as little as $ 0.04 per gallon will increase the refinery's annual operating profit by more than $ 100 million, a substantial sum.
Will this help Delta find a partner?
Since last year, Delta has been looking for a strategic partner to buy a stake in the Trainer refinery. Given that it only needs jet fuel for its airline business – not all the other products the refinery produces – finding a partner to handle the rest of the refinery's production would make sense.
So far, Delta has not been able to close an agreement. The company has even investigated selling the refinery completely, according to Reuters – although managers have contested this report.
Whether a sale or a joint venture is the ultimate goal, the closure of the Philadelphia Energy Solutions refinery will help Delta. Potential partners (or buyers) who may have been nervous about the Trainer facility's finances may be willing to take a fresh look now, due to the more favorable competitive landscape. In spite of the refinery's ups and downs over the years, Delta's bold move to enter the refining business is continuing to pay off in the long run.