Will New Oil Deal Help Delta Take Off?

05/09/2012 10:05 am EST

Focus: STOCKS

Delta Airlines’ (DAL) bold venture into the oil refinery business could be a game changer for the airline industry and the company’s stock price, writes Mike Kapsch of CountingPips.com and InvestmentU.com.

Delta Airlines (DAL) will soon become the first airline ever to provide its own domestic fuel. If all goes according to plan, by the end of June, the company will:

  1. Start saving $300 million a year on fuel costs;
  2. Add 5,000 new jobs to its payroll, and…
  3. See its share price steadily rising for the foreseeable future.

How does it expect to do all of this?

Delta’s Bold Move into Oil Refinement

Last year, domestic prices for airfare hit an all-time record high according to the US Department of Transportation. The number-one reason for this is fuel costs. For Delta, nearly 40% of its revenue went to keeping its planes fueled. And so far this year, these costs only continue to rise.

That’s why, earlier this week, Delta agreed to pay ConocoPhillips (COP) $150 million for an oil refinery that was otherwise going to close in May in Trainer, Pennsylvania. The refinery is set to process 185,000 barrels per day (bpd) of crude oil, and Delta expects to cover 80% of its fuel costs in the United States beginning in 2013.

Even Pennsylvania contributed an additional $30 million because it will save the jobs of 5,000 workers currently employed at the refinery. It’s undoubtedly a risky move. Some are even calling Delta crazy. After all, the oil refining business can be just as volatile at times as the airline industry.

But others, myself included, see it as a potential game changer.

The Road Ahead

As MSNBC explains, “For one thing, the refinery is located in one of the carrier’s most important markets and will be able to provide a steady fuel supply to the company’s operations at JFK, LaGuardia, and other East Coast airports.

For another, ConocoPhillips, the refinery’s current owner, was in the process of idling the plant and reportedly “eager to sell.” In other words, not only is the refinery in a key locale, Delta also purchased the facility at a very steep discount.

Delta expects an additional $100 million investment into the plant will turn it into a top-notch jet-fuel-producing facility by next year. And in order to make sure everything stays on task, Delta hired 25-year refinery veteran Jeffrey Warmann to manage the refinery’s operations.

In fact, prior to joining forces with Delta, Jeffrey was a refinery manager for Murphy Oil Corp. (MUR), so if anyone’s going to get the job done, it’s going to be this guy.

How do traders and investors feel about the deal?

Over the past few weeks, Delta’s stock price climbed 20%. You can bet if Delta’s oil refinery ends up being a big money saver, as well, shares will likely soar even higher. If other companies follow suit, it could end up being a home run for Delta’s shareholders.

The bottom line: this is certainly a development worth keeping your eye on.

By Mike Kapsch, contributor, CountingPips.com and InvestmentU.com

Do you think this decision by Delta Air Lines will help the company’s bottom line and stock price? Share your thoughts in the comments section below.

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