If there was ever a “think out of the box” deal in 2012, it was Delta Airlines’ purchase of the Trainer refinery, near Philadelphia, from Phillips 66.
The man who from all accounts was central to that deal getting done was Jon Ruggles, a former trader who headed Delta’s jet purchasing. At the Philadelphia press conference announcing the deal, Ruggles was up at the front, along with the political dignitaries from the city and state, along with the the airline’s senior management.
And now he’s gone.
As Platts’ Matt Kohlman reported Friday, Ruggles has left Delta for unknown reasons. A Delta spokesman confirmed his departure without elaborating as to the reasons.
“It leaves a big void,” a US jet fuel buyer told Matt. “What’s Delta going to do? He was over their fuel, hedging and physical, plus trading.”
What’s more interesting is just what the departure says about the success or failure of the Trainer acquisition. The last time Trainer was in the news was during Hurricane Sandy, when it and the other Philadelphia area refineries weathered the storm relatively well, allowing a tight supply situation in the New York harbor area to not be worse than it would have been otherwise.
But what are the economics at Trainer? The Delta deal was so different than anything the refinery industry had ever seen that it can’t be easily measured like other metrics. Delta’s goal was to capture an increasingly healthy jet crack—the difference between New York harbor jet fuel prices (and by extension other East Coast prices) and the price of crude, as measured by Brent. In essence, by hedging Delta’s earlier fuel exposure on Brent, it could only protect itself against movements in that crude benchmark. If the jet spread blew out, well, too bad; a hedge that’s against crude doesn’t capture that for an airline. Hedging through swaps for that much jet can be illiquid and expensive.
The answer? Buy a refinery.
Crack spreads for jet do remain healthy. For example, looking at Friday’s Platts assessments against Dated Brent, a simple jet crack for low sulfur jet was running around $23.50/b; for higher-sulfur jet, around $20.80/b, and about $20.35/b for ultra low sulfur distillate (which Delta would sell, not consume, but it is a distillate, like jet.)
But the crack on RBOB, the primary gasoline blendstock on the US East Coast, was only about $6.45/b. So after other costs, that’s probably a loser for a refiner. Even before other costs, most higher-sulfur residual fuel is in the red for any East Coast refiner.
So the question on Trainer will always be if the positive jet cracks it’s putting into its pockets offsets the poor margins on the lightest and heaviest ends of the barrel. (The other question is how much of the refinery’s crude slate has been supplanted by Bakken and Canadian barrels moved in to the East Coast by rail, which could be yielding significantly different economics than a basic Brent crack would seem to indicate.)
“Half their barrel is negative, more than half,” one trader told Matt, suspecting that the Trainer deal is overall a loser for the company. “What’s their appetite for pouring cash into it? It’s not like they have a gasoline outlet.” The alternative view: “A lot of the innovative things they’re doing in the marketplace are not bad things,” one fuel buyer said, believing the deal is more positive to the company.
Eventually, Delta will need to disclose some general information on the refinery’s status in its quarterly earnings releases. Until then, its financial condition will be mostly speculation, fueled beyond normal by Jon Ruggles’ departure.