Delta Air Lines, Inc (DAL)

[Enterprising Investor]

Delta Air Lines seeks buyers for a stake in its refining subsidiary (9/04/18)

NEW YORK (Reuters) - Delta Air Lines has hired two investment banks to offer a stake in its Monroe Energy refining subsidiary, signaling it wants a partner to shoulder the risk of running an energy business.

The Atlanta-based airline acquired the 185,000-barrels-per-day refinery in 2012 for $150 million in a bet that it could lower its cost of jet fuel, among the highest expenses for any airline. The refinery also makes gasoline and diesel for profit.

The U.S refining industry has been consolidating into larger players that can use scale to lower their cost of buying raw materials and paying for regular overhauls. In the U.S. East Coast, four refineries closed in the past decade due to the rising costs of acquiring crude.

Ed Hirs, a professor of energy economics at the University of Houston, said the attempt to recruit a joint venture partner is no sure thing.

“It was a boneheaded decision then, and they are still paying for it. It is going to be tough to sell a refinery that has faced closure several times due to bad economics,” he said.

Delta defended its effort to bring in a partner.

It is planning to invest $120 million in Monroe Energy’s Trainer, Pennsylvania, plant next quarter on maintenance and improvements. That overhaul will curb production for two months.

“After several years of ownership it is natural for Delta to seek other opportunities that might exist to optimize the benefits to Delta and maximize the value of other aspects of the refinery for a potential joint venture partner,” Paul Jacobson, Delta’s finance chief, said in a statement.

Delta has said the refinery’s purchase was more than a way to make a profit from the subsidiary, arguing that if the facility had closed it would have sent jet fuel prices higher across the Northeast, hurting the airline’s results.

But more recently Delta has run the plant like a traditional refinery, choosing to make more of whatever refined product offered the highest margin.

The company has hired investment banks Barclays and Jefferies to manage the sale process. The banks have already begun talking with potential suitors, according to sources familiar with the matter. It was not immediately clear what valuation the company has put on the stake offered.

Delta has grappled with the best way to manage Monroe.

Last year, it hired a consultant to evaluate the impact on jet fuel prices of any sale or closure of the refinery. The company downplayed the evaluation’s significance at the time, calling it routine.
East Coast refiners got a lifeline from the Bakken shale boom in North Dakota earlier this decade. Production there outpaced pipeline capacity, forcing producers to offer steep discounts to East Coast refiners like Monroe.

However, the discounts have vanished in recent years as more pipeline capacity came online in the upper U.S. Midwest. That forced Monroe and other U.S. East Coast refineries once again to buy higher priced crudes for their plants, reverting back to the poor economics that hurt them a few years earlier.

Reporting by Jessica Resnick-Ault and Jarrett Rensaw in New York; Writing by Gary McWilliams; Editing by Leslie Adler

https://www.reuters.com/article/us-delta-air-m-a-refinery/delta-air-lines-seeks-buyers-for-a-stake-in-its-refining-subsidiary-idUSKCN1LM02U