Delta Air Lines, Inc (DAL)

[Enterprising Investor]

Delta Air to sell gasoline and diesel as losses at its refinery climb (12/02/16)

By Chris Prentice and Jarrett Renshaw

Delta Air Lines Inc is preparing to market gasoline from a refinery it owns outside Philadelphia, signaling a shift in strategy toward managing the plant as a commercial refiner rather than a dedicated jet fuel supplier.

Delta became the first airline to own a refinery when it bought the shuttered plant in 2012, hoping to turn the facility into its own jet fuel supplier and capitalize on cheap oil supplies from a boom in U.S. shale output.

Instead of marketing the gasoline and diesel from the 185,000 barrels per day Monroe Energy plant, until now Delta has swapped the billions of dollars of motor fuel for jet fuel under a contract with Phillips 66 that is set to expire next year.

Now, Monroe is ramping up to sell small volumes of blended gasoline and ultimately diesel at a distribution center owned by Sunoco Logistics Partners outside Philadelphia, a source familiar with the plan told Reuters.

The sales will allow Monroe to benefit from motor fuel profit margins, an attempt to turn around a loss-making plant at a difficult time for the refining industry along the U.S. East Coast, added the source.

The region's refiners are fighting to survive, as they rely on foreign waterborne crude for supply. Two plants in the region have been shut in the past decade.

The company plans to increase sales volumes, including of diesel, over the next year after the Phillips 66 swap agreement expires, according to the source, who asked not to be identified because he was not authorized to speak with the press.

A Delta spokesman declined to comment on the plan and a Monroe Energy spokesman said the company does not discuss operations.
"At this point, they may feel they have better economics to sell the gasoline outright," said Robert Mann, a former airline executive and principal at R.W. Mann & Company, Inc.

A commercial refiner would look at profit margins for each fuel, which vary seasonally, and adjust production to maximize the output of the fuel with the best margin. Delta has been maximizing jet fuel output, regardless of variations in margins.

That may have saved Delta money on jet fuel supplies, but cost it potential profit from producing other products.

Mann said if the refiner abandons efforts to maximize jet fuel supply, Delta may reconsider whether owning the plant is worthwhile.

DRAG ON PROFITS

After a few successful years, the refinery has lost money in 2016 amid an industry-wide slump that has hit East Coast refiners the hardest. The refinery lost $83 million in the first nine months of the year compared to $282 million in profits last year.

Monroe Energy slashed employee bonuses to save money earlier this year. But the refiner's manager, Jeff Warmann, told employees then not to worry about mounting losses because the real goal was to pump jet fuel and drive prices down.

Monroe, like other merchant refiners, has also taken a hit from rising costs to meet U.S. annual biofuels requirements. Those require refiners who cannot blend biofuels, as mandated by the government, to buy paper credits from those that can. Those credits, called RINs, have soared in cost in the time Delta has owned the plant.

In the first three quarters of this year, Monroe paid $130 million to purchase RINs, nearly double the $67 million during the same time the year earlier.

Blending ethanol into gasoline will allow Monroe for the first time to generate credits, though it will still meet just a fraction of its total biofuels obligation. Delta has been embroiled in a years-long lawsuit with the Environmental Protection Agency over the scheme, which the airline says are too heavy a burden.

http://www.reuters.com/article/us-usa-refinery-delta-air-idUSKBN13R2F3