Written by: Jeffrey Simpson, Angus Finance | As seen in Fuel Oil News
Hedging & Pricing Program Considerations
If you plan to offer pre-buy, fixed price or capped price programs this year, have you reviewed the number of gallons and customers participating in each last year? What new variables could affect the level of participation in each this year?
While last year’s participation levels and gallons will serve as a good starting point, keep in mind that differing commodity price levels and the economic climate can significantly affect participation and nullify your assumptions. Remember, it’s better to be conservative. You can always fill in your needs after your program offering. Furthermore, contact your hedging consultant immediately if you find you have over-purchased or under-purchased product for your programs so corrective action can be taken before larger price shifts occur.
Do you have a consistent annual date for announcing your program offering?
Stick to it! Nothing scares your customers more (and turns them into price shoppers faster) than a delayed offering. Remember, customers generally seek the benefits of the program in which they participate, not a specific price. Have you thought about the “Design Risks” associated with your program offerings — not just the “Implementation Risk?” In addition to properly hedging your program offerings, be aware that issues often overlooked by dealers in formulating pricing programs — pricing windows, volume assumptions, credit availability, banking and supplier relationships, cash flow impact and margin assumptions — all can have a detrimental effect on your company’s financial standing if not fully understood before you begin to enroll customers.
When you buy your wet barrel contracts for next year’s Capped Price program, are you buying puts (protecting the downside) simultaneously?
Remember, delaying is speculating! In the current banking and credit environment, financial losses from speculation (whether knowingly or “unknowingly”) reflect poorly on management and can severely impact your ability to obtain the necessary credit facilities to operate during the heating season.
Balance Sheet & Cash Flow Considerations
Calculate your working capital position: Does your current ratio (Current Assets ÷ Current Liabilities) exceed 1.0x?
If not, be aware that you are operating with a working capital deficit.
If you have a working capital deficit, do you need to put more capital into the company or will other modifications to margins and program offerings alone solve the problem?
In the current banking climate and depending on the expected time to rebalance your working capital position, you may find that a capital contribution is a prerequisite to obtaining/maintaining bank financing.
Are you confident that your credit availability (supplier lines plus bank line(s) of credit) will comfortably cover your peak-season needs?
If not, changes to your program offering may be required to reduce credit need. Many variables can affect your company’s peak needs, including commodity cost, margin, receivable turns (i.e., length of time before you’re paid) and budget payments. Even if you are comfortable with your credit availability, explore the ways programs could be modified to further reduce interest expense.
DISCLAIMER: When applicable, advice from Angus Energy may include a discussion about risk mitigation via commodity and/or weather hedging.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware that you could lose all or substantially all of your investment and may be liable for amounts well above your initial investment.