Refining and the Airline
October 23, 2012
Contents
“Delta 101”
Why Trainer and why now?
Market reaction
Delta holds a long heritage as the world’s leading airline
 Delta is the world's largest airline by passenger miles
 5th oldest airline founded in 1928 (Delta’s legacy includes the former
Northwest, Pan Am, Republic, Western, Northeastern, and Hughes
AirWest airlines)
 Founding member of the SkyTeam Alliance, Joint-Venture partner with
AirFrance/KLM and Alitalia and partial owner of AeroMexico and GOL of
Brazil
 Fortune Magazine’s 2011 World’s Most Admired Airline
 $35 billion in annual revenue
 160 million customers annually served through 340 destinations
 $44 billion in assets
 More than 700 mainlines aircraft plus 700 regional jets
 80,000 employees plus ~100,000 contractors
 Hubs located in Atlanta, New York’s JFK and LaGuardia, Detroit,
Minneapolis, Cincinnati, Memphis, Salt Lake City, Los Angeles, and
overseas in Tokyo, Amsterdam, and Paris
2
Operational focus is critical to run Delta’s complex business
Operations
 1,400 airplanes moving 500,000
passengers per day
 Zero fault tolerance environment for
equipment (12-sigma equivalence in
quality) while still providing >99.8%
equipment availability
 Largest carrier in the world has gone
24 years without a major aviation
incident (roughly 40 million flights)
Manufacturing
 Delta TechOps has 10,000 employees
rebuilding airplanes and engines
 Delta performs its own maintenance
plus it serves 150 other carriers making
it the third largest MRO business in the
world
 3 million square feet of manufacturing
space in Atlanta plus facilities in
Minneapolis and Mexico
Real Estate
 $3 billion in spending on current
projects
 In-house management of major
construction projects such as
the JFK Terminal 4 complex,
LAX and La Guardia expansions
 >30 million square feet of
commercial space is managed
by Delta
3
Delta developed an internal oil company long before Trainer
Fuel value chain for Delta
Refining
Point where
airlines
traditionally
have engaged
in the value
chain
Logistics
Terminalling
Delta has been one
Delta controls
of the largest
several hundred
shippers on the
thousand barrels
Colonial, Plantation,
of storage
Buckeye, and Teppco
outside of its
pipeline systems
airports to
moving upwards of
facilitate its self175,000 bpd
supply function
On-site Facilities
Fuel Loading
Delta owns, leases, co- Several thousand
owns, and/or oversees
fuel loadings per
26 on-airport fuel
day – each
facilities with their
requiring a
associated fuel tanks,
specialized
filtration equipment,
technician, a load
distribution pipelines, planner, and 30-90
hydrants, and fuel carts minutes to execute
If Delta’s fuel function (ex-Trainer) were to be a separate company, it
would constitute the following:




Approximately 1,100 employees and contractors
More than $1bn in fixed assets
Roughly $500mn in working capital
Annual revenue of $12bn
Delta is the world’s largest private consumer of fuel
261
248
Airlines
UAL/CO
114
Southwest
Air Tran
77
27
FEDEX
138
Air & ground
BNSF
Railroad
Denmark
Portugal
Would be in the
world’s top 50
as a standalone country
184
American
US Air
Other (all consumption)
Daily Fuel Consumption (000s bpd of all fuels)
Delta
110
167
276
Contents
“Delta 101”
Why Trainer and why now?
Market reaction
Delta’s exposure to fuel price is not a simple crude short…
Risk
Type
Root Causes of
volatility
Natural Hedge
for Delta
$/bbl
Crude
oil price
risk
130
120
110
100
90
80
70
 Economic growth
combined with higher
production costs
Brent
 Economic growth
25
Refining
Margin
Risk
20
 Supply shocks
Heat
Crack
15
Price levels can
be passed through
to customers
Delta’s loss
Some price risk
can be passed
through
Supply constraints
10
5
 Supply shocks and
weather events
All risk borne by
Delta
8
Jet Fuel
Specific
Risk
6
4
2
0
-2
Jet
versus
Heat
 Regional market
variations
All risk borne by
Delta
…the jet crack is the fastest growing element of fuel expense…
Fuel Expense
Transport
Pipeline & barge
$430mn
Taxes
Fuel excise taxes
$240mn
Product
Markup
Represents the profit
margin and marketing
spread that a refiner
and reseller/trader gain
from jet sales, which
are typically the most
profitable sales at the
refinery
$2.2bn
Refining
Cost
Operating cost
$590mn
Crude
Oil
Purchase cost of the
average source
feedstock for jet fuel (all
crude contains jet fuel,
some contain more
than others)
$8.5bn
Total
100%
2.1%
3.6%
18.5%
Jet crack
spread tripled
since 2009
5%
71%
$12bn
8
…driven by dieselization and slowing demand for gasoline
Gasoline
Diesel & Jet
Daily transportation fuel consumption in 000s bpd
United States
European Union
10,000
8,000
9,000
7,000
China
4,000
+13%
3,500
3,000
8,000
6,000
2,500
7,000
+125%
5,000
2,000
6,000
4,000
5,000
2000
3,000
2005
2010
2000
-21%
2005
2010
1,500
1,000
2000
2005
European fuel switching from gasoline to diesel and voracious BRIC demand for middle
distillates are driving the global imbalance between gasoline and diesel
Source: BP Statistical Yearbook
2010
Criteria for purchasing a refinery
Beliefs about
the market
The jet-crack will remain high for several years
Refinery capacity shut-ins will drive margin volatility and regional shortages
Properly sized – large enough to make a material impact on the company’s
profitability but not larger than Delta’s consumption
Criteria
for the
refinery
A Relevant to the company’s demand centers (domestic, USGC or USEC
based)
B Flexible refining kit able to maximize jet production with minimal investment
Well-maintained plant that had not suffered from under-investment
Actionable within a year
Criteria for
the deal
C Viable as a stand-alone business
D Provide a mechanism for non-jet product disposition
The Trainer deal
199,000 bpd refinery located in Trainer, Pennsylvania (Philadelphia)
Asset
 Pipeline system and 3 oil terminals included in sale
 Solomon Complexity Index of 9.6 with a replacement value of $2.7 billion
Price of $180 million ex-hydrocarbon inventory (6% of replacement value)
Terms
$30 million grant from the Commonwealth of Pennsylvania
$100 million in turnaround and small capital expense for max-jet mode
A
Trainer is able to supply most of Delta’s northeastern fuel demand
Trainer jet flows to local market
Production and consumption in kbd
Upstate NY
LGA
Buckeye
Production
Twin
Oaks
JFK
EWR
PHL
Harbor
Pipeline
JFK & LGA
Other
Delta
Consump.
Trainer
PIT
Laurel
Pipeline
Monroe Pipelines
Waterborne
exports
Swing &
export
52
B
The flexible refining kit at Trainer is capable of full conversion…
2-Stage Hydrocracker – 26,000 bpd
Hydrotreating
Units
Distillate
VGO HT
DHT
Kero HT
Gasoline
NHT
Post-Cat NHT
Reformer – 60,000 bpd
Resid Fluid Catalytic Cracker – 55,000 bpd
B
…and a jet-optimized product yield at minimal expense
Refinery Operation from 2007-2011
19% Diesel
14% Jet
Pricing
Monroe Planned Refinery Operation
Middle
distillates
18% Diesel
= 50% of
total margin
risk
32% Jet
Gasoline
= 44% of total
margin risk
52% Gasoline
15% Fuel Oil, LPG
44% Gasoline
Byproduct
= 7% of risk
7% Fuel Oil,
LPG, Other
C
Trainer would be viable as a stand-alone business
Trainer performance backcasted with Monroe’s operating plan
$ million per quarter
300
275
250
225
200
Average EBIT =
$551 MM/year
175
150
Average EBIT =
$345 MM/year
125
100
75
50
25
0
-25
-50
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
$300 million per
year in earnings
appears, at first
glance, to be too
high for a $250
million investment,
however, the
returns are
appropriate for a
business that if
newly built would
cost $2.7 billion and
consume an
additional $500
million in working
capital for a pre-tax
asset return of 9%
D
Exchanges with P66 and BP dispose of all non-jet production while
simultaneously fueling Delta’s self-supply network
Delta also carries a significant tax advantage versus other refiners
Effective Tax rate
2010
41%
38%
Post-tax
earnings benefit
of $120 million
per year versus
ExxonMobil’s
domestic tax
rate at Monroe’s
forecast
earnings run
rate
29%
2%
ExxonMobil
Valero
Frontier
Delta
Monroe has a seasoned management team
Years
Energy
Experience
Team Member
Background / Prior Companies
Jeff Warmann
CEO
•
•
All aspects of refinery, process and trading operations
Murphy Oil, Frontier Refining, Western, Williams
28
Frank Pici
CFAO
•
•
15 years as public co. CFO in refining, upstream, MLP
CVR Energy, Penn Virginia, Mariner Energy, Cabot O&G
30
Coby Stewart
VP / Maintenance Lead
•
•
Construction, maintenance, turnaround experience
Frontier Refining, Chicago B&I, Flour Corp.
33
Rodney Smith
VP / Controller
•
•
Senior accounting and financial professional
Delek, Western Refining, Holly Corp
20
Brian Carlson
Operations Leader
•
•
Process engineering, economics, technical background
Frontier Refining, Citgo Petroleum
11
Rick Chavez
Technical Leader
•
•
Economics & Planning, M&A, project development
Stancil, Williams, Lyondell, El Paso, Amerada Hess
27
Pete Pirog
VP MIPC Pipeline
•
•
Pipeline construction, scheduling , storage logistics
ConocoPhillips, Buckeye Pipeline
15
Liz Lundmark
Environmental Leader
•
•
Deep environmental compliance & logistic experience
Murphy Oil
22
Keenan Kendrick
H&S Leader
•
•
Process Safety Management, Change Management
Western Refining, ChevronTexaco Downstream
11
18
Contents
“Delta 101”
Why Trainer and why now?
Market reaction
Market reaction
Refining market “pundits”
Equity Analysts
If Delta thinks they will be able to lower fuel
volatility, they are sadly mistaken – Phil Flynn
It goes beyond Delta’s core
competency – Stephen Schork
It is worth a shot,
the refinery is
only about the
cost of a single
new widebody jet
– Ray Neidl
Business Press
Trainer attracts a lot
of haters of Delta’s
stock – CNBC
It could be brilliant or a
disaster, only time will tell –
CNN Money
Debt Analysts
Trainer is an
innovative approach
to the long-term
management of the
airline's jet fuel
costs, notwithstanding the
operational risks of
running a refinery –
Fitch
Other airlines
Airlines, after all, know a thing or
two about managing high risk,
logistics intensive, industries –
Janet McGurty, Reuters
Delta would get into the refinery
business only because they are stupid
– Ed Hirs, U. of Houston in Forbes
If it works for Delta,
it can work for us –
and is completely
reproducible – Jeff
Smisek, CEO of UAL
Shocking revelation… this has been done before!
1955: Malcolm McLean creates the Sea-Land
shipping company to focus on containerized
shipping, the company grows rapidly
1969: RJR
purchases SeaLand Corp. for
$530 million
1948: Aminoil (American Independent Oil Company)
wins a concession to develop oil in Kuwait
1958: Aminoil builds the
Mina Abdullah Refinery
1968: Aminoil expands
Mina to 145,000 bpd,
yields 50% bunker fuel
(company nears
bankruptcy)
1970: RJR purchases 100% of
Aminoil for $40 million to hedge
its Sea-Land’s fuel expense
1974: Earnings for Sea-Land
reach $145 million; Aminoil
earns $86 million
1984: RJR spins off Sea-Land
(later merged to form CSX)
During 14-years of
vertical integration
both Sea-Land and
Aminoil had record
years of profitability
1984: RJR sells Aminoil to
Phillips 66 for $1.7 billion
Questions?