Shares of U.S. jet fuel refinery Delek U.S. (DK 2.18%) rallied on Thursday, up 6% on the trading day, even as markets overall were flat.
Delek is a small- to mid-cap refining stock that also owns a 63% stake in Delek Logistics Partners (DKL +0.34%). While the company is small, it is also known for having a high percentage of refining revenue coming from jet fuel, compared with most other domestic fuel refineries.
Today, a fire at another U.S. refinery that primarily supplies jet fuel, owned by one of the major U.S. airlines, spurred a rally in Delek, which could become a beneficiary.
NYSE: DK
Key Data Points
A fire at Delta's Trainor could lead to higher margins for Delek
Today, a fire broke out at the Trainer refinery in Trainer, PA. Of note, this refinery is owned by Monroe Energy, a wholly owned subsidiary of Delta Air Lines (DAL +0.53%). Delta is the only airline to own its own refinery, which it uses as a competitive advantage during periods of high jet fuel prices.
Refineries are a "spread" business that earns profits based on the margins they charge fuel buyers, and this spread is largely determined by supply and demand. Therefore, if a competing refinery goes down for a while due to a fire and related repairs, supply will be limited, and rivals' prices and margins will increase. Therefore, the Trainer facility fire stands to benefit Delek.
Delek had already seen soaring profits this year due to the war in Iran and Russia, which disrupted global supply. Now, with this fire at a rival, things could retighten, even after the "ceasefire" memorandum of understanding between the U.S. and Iran.
Image source: Getty Images.
Delek is an interesting energy opportunity
It appears investors believe that since the war with Iran has ended, energy prices and jet fuel margins will revert to "normal" very soon, and that Delek's high margins should come down. However, that remains to be seen. Meanwhile, investors don't appear to be accounting for Delek's stake in Delek Logistics Partners. That 63% stake would be worth about $1.7 billion today, or 58% of Delek's market cap.
It's unclear exactly how long the Trainer refinery will be offline. Regardless, Delek looks pretty cheap at this valuation. And if the Trainer facility is offline for months for repairs, that would make Delek stock compelling here.
