Refining and the Airline October 23, 2012. Contents Delta 101 Why Trainer and why now? Market...
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Transcript of Refining and the Airline October 23, 2012. Contents Delta 101 Why Trainer and why now? Market...
Refining and the Airline
October 23, 2012
Contents
“Delta 101”
Why Trainer and why now?
Market reaction
3
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
4
Operational focus is critical to run Delta’s complex business
ManufacturingOperations Real Estate
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
$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
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)
Delta developed an internal oil company long before Trainer
Refining
Point where airlines traditionally have engaged in the value chain
Logistics Terminalling On-site Facilities Fuel Loading
Fuel value chain for Delta
Delta has been one of the largest
shippers on the Colonial, Plantation,
Buckeye, and Teppco pipeline systems moving
upwards of 175,000 bpd
Delta controls several hundred thousand barrels
of storage outside of its
airports to facilitate its self-supply function
Delta owns, leases, co-owns, and/or oversees
26 on-airport fuel facilities with their
associated fuel tanks, filtration equipment,
distribution pipelines, hydrants, and fuel
carts
Several thousand fuel loadings per
day – each requiring a specialized
technician, a load planner, and 30-90 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 fuelD
ail
y F
ue
l C
on
su
mp
tio
n (
00
0s
bp
d o
f a
ll fu
els
)
114
27
77
184
248
261
Air Tran
US Air
Southwest
American
UAL/CO
Delta
Air
lin
es
167
276
110
138
Portugal
Denmark
BNSFRailroad
FEDEXAir & ground
Oth
er
(all
co
ns
um
pti
on
)
Would be in the world’s top 50
as a stand-alone country
Contents
“Delta 101”
Why Trainer and why now?
Market reaction
Crude oil price
risk
Refining Margin
Risk
Jet Fuel Specific
Risk
7080
90100
110120
130
5
10
15
20
25
-2
0
2
4
6
8
Risk Type
Root Causes of volatility
Natural Hedge for Delta
Economic growth combined with higher production costs
Supply shocks
Price levels can be passed through to customers
Delta’s loss
Economic growth
Supply constraints
Supply shocks and weather events
Some price risk can be passed
through
All risk borne by Delta
Regional market variations
All risk borne by Delta
$/bbl
Brent
HeatCrack
Jet versus Heat
Delta’s exposure to fuel price is not a simple crude short…
9
…the jet crack is the fastest growing element of fuel expense…
100%
71%
5%
18.5%
3.6%
2.1%
Fuel Expense
Transport
Taxes
Product
Markup
Refining
Cost
Crude
Oil
$430mn
$240mn
$2.2bn
$590mn
$8.5bn
Pipeline & barge
Fuel excise taxes
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
Operating cost
Purchase cost of the average source feedstock for jet fuel (all crude contains jet fuel, some contain more than others)
$12bnTotal
Jet crack spread tripled since 2009
8,000
7,000
6,000
5,000
4,000
3,000
201020052000
-21%
+13%
…driven by dieselization and slowing demand for gasoline
Source: BP Statistical Yearbook
2000 2005 2010
10,000
9,000
8,000
7,000
6,000
5,000 1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000 2005 2010
+125%
Diesel & Jet
Gasoline
United States European Union China
Daily transportation fuel consumption in 000s bpd
European fuel switching from gasoline to diesel and voracious BRIC demand for middle distillates are driving the global imbalance between gasoline and diesel
Criteria for purchasing a refinery
Properly sized – large enough to make a material impact on the company’s profitability but not larger than Delta’s consumption
Relevant to the company’s demand centers (domestic, USGC or USEC based)
Flexible refining kit able to maximize jet production with minimal investment
Well-maintained plant that had not suffered from under-investmentActionable within a year
Viable as a stand-alone business
Provide a mechanism for non-jet product disposition
The jet-crack will remain high for several years
Refinery capacity shut-ins will drive margin volatility and regional shortages
Beliefs about the market
Criteriafor the
refinery
Criteria for the deal
A
B
C
D
The Trainer deal
199,000 bpd refinery located in Trainer, Pennsylvania (Philadelphia)
Pipeline system and 3 oil terminals included in sale
Solomon Complexity Index of 9.6 with a replacement value of $2.7 billion
Asset
Price of $180 million ex-hydrocarbon inventory (6% of replacement value)
$30 million grant from the Commonwealth of Pennsylvania
$100 million in turnaround and small capital expense for max-jet mode
Terms
Trainer is able to supply most of Delta’s northeastern fuel demandA
LGA
JFK
EWR
HarborPipeline
LaurelPipeline
TwinOaks
Buckeye
Upstate NY
Waterborne exports
Trainer jet flows to local market
52
Swing &export
OtherDelta
Consump.
JFK & LGA
Production
Production and consumption in kbd
Trainer
Monroe Pipelines
PIT
PHL
The flexible refining kit at Trainer is capable of full conversion…
Hydrotreating Units
DistillateVGO HTDHTKero HT
GasolineNHTPost-Cat NHT
Reformer – 60,000 bpd2-Stage Hydrocracker – 26,000 bpd Resid Fluid Catalytic Cracker – 55,000 bpd
B
…and a jet-optimized product yield at minimal expense
Refinery Operation from 2007-2011 Monroe Planned Refinery Operation
Middle distillates
= 50% of total margin
risk
Gasoline
= 44% of total margin risk
Byproduct
= 7% of risk
19% Diesel
Pricing
14% Jet
52% Gasoline
15% Fuel Oil, LPG
44% Gasoline
18% Diesel
32% Jet
7% Fuel Oil, LPG, Other
B
Trainer would be viable as a stand-alone businessC
Trainer performance backcasted with Monroe’s operating plan$ million per quarter
-50
-25
0
25
50
75
100
125
150
175
200
225
250
275
300
Q1 2011
Q1 2010
Q1 2009
Q1 2008
Q1 2007
Q1 2006
Average EBIT = $551 MM/year
Average EBIT = $345 MM/year
$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%
Exchanges with P66 and BP dispose of all non-jet production while simultaneously fueling Delta’s self-supply network
D
ExxonMobil FrontierValero
41%
38%
2%
29%
Delta
Effective Tax rate 2010
Delta also carries a significant tax advantage versus other refiners
Post-tax earnings benefit of $120 million per year versus ExxonMobil’s domestic tax
rate at Monroe’s forecast
earnings run rate
Team Member Background / Prior CompaniesYears
Energy Experience
Jeff WarmannCEO
• All aspects of refinery, process and trading operations• Murphy Oil, Frontier Refining, Western, Williams
28
Frank PiciCFAO
• 15 years as public co. CFO in refining, upstream, MLP• CVR Energy, Penn Virginia, Mariner Energy, Cabot O&G
30
Coby StewartVP / Maintenance Lead
• Construction, maintenance, turnaround experience• Frontier Refining, Chicago B&I, Flour Corp.
33
Rodney SmithVP / Controller
• Senior accounting and financial professional• Delek, Western Refining, Holly Corp
20
Brian CarlsonOperations Leader
• Process engineering, economics, technical background• Frontier Refining, Citgo Petroleum
11
Rick ChavezTechnical Leader
• Economics & Planning, M&A, project development• Stancil, Williams, Lyondell, El Paso, Amerada Hess
27
Pete PirogVP MIPC Pipeline
• Pipeline construction, scheduling , storage logistics• ConocoPhillips, Buckeye Pipeline
15
Liz LundmarkEnvironmental Leader
• Deep environmental compliance & logistic experience• Murphy Oil
22
Keenan KendrickH&S Leader
• Process Safety Management, Change Management• Western Refining, ChevronTexaco Downstream
11
19
Monroe has a seasoned management team
Contents
“Delta 101”
Why Trainer and why now?
Market reaction
Delta would get into the refinery business only because they are stupid – Ed Hirs, U. of Houston in Forbes
Airlines, after all, know a thing or two about managing high risk, logistics intensive, industries – Janet McGurty, Reuters
Market reaction
Debt AnalystsRefining market “pundits” Equity Analysts
Other airlinesBusiness Press
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
Trainer is an innovative approach to the long-term management of the airline's jet fuel costs, notwith-standing the operational risks of running a refinery – Fitch
Trainer attracts a lot of haters of Delta’s stock – CNBC
It could be brilliant or a disaster, only time will tell – CNN Money
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
1948: Aminoil (American Independent Oil Company) wins a concession to develop oil in Kuwait
1970: RJR purchases 100% of Aminoil for $40 million to hedge its Sea-Land’s fuel expense
1969: RJR purchases Sea-Land Corp. for $530 million
1958: Aminoil builds the Mina Abdullah Refinery
1968: Aminoil expands Mina to 145,000 bpd, yields 50% bunker fuel (company nears bankruptcy)
1974: Earnings for Sea-Land reach $145 million; Aminoil
earns $86 million
1984: RJR spins off Sea-Land (later merged to form CSX)
1984: RJR sells Aminoil to Phillips 66 for $1.7 billion
During 14-years of vertical integration both Sea-Land and Aminoil had record years of profitability
Questions?