Delta Airlines Considers Buying an Oil Refinery (DAL, COP, SUN, HES)
In what has to be one of the dumbest notions ever, Delta Air Lines Inc. (NYSE: DAL) is reported to be considering buying an oil refinery. There are plenty for sale in the US, including the ConocoPhillips (NYSE: COP) 185,000…
The reason these refineries are for sale is because they are — most of the time — money-losers. Except for Hovensa, all are capable of refining only Brent-quality crude, which is currently the most expensive crude in the world, and the international benchmark for pricing other grades.
Today, Brent costs about $123/barrel. From a 42-gallon barrel of crude at a more or less standard refining ratio (called the ‘crack spread’), a refinery actually produces nearly 45 gallons of refined products (that’s called ‘refinery gain’). Of that production, about 3.5 gallons are kerosene — aka, jet fuel.
The current cost of a barrel of jet fuel is $139 according to the International Air Traffic Association. If it becomes a refiner, the only thing Delta can wring out of that cost is profit, which is currently non-existent in east coast refineries. That’s why real oil companies are closing the refineries.
Of course Delta can sell all the other products — gasoline, diesel fuel, etc. — but then it needs either to contract that out or have a staff to manage the sale. No savings there.
There’s an old joke that the way to make a small fortune in the entertainment business is to start with a large fortune. The same thing is true of the refining business.
Paul Ausick
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Paul Ausick has been writing for 247Wallst.com for more than a decade. He has written extensively on investing in the energy, defense, and technology sectors. In a previous life, he wrote technical documentation and managed a marketing communications group in Silicon Valley.
He has a bachelor's degree in English from the University of Chicago and now lives in Montana, where he fishes for trout in the summer and stays inside during the winter.
