Are All Profits Within Your View?
By Matthew Ide, managing director of RenRe Energy Advisors Ltd., and Jeffrey Simpson, director of the Energy Advisory & Finance Group at RenRe Energy Advisors Ltd.
Ownership of a bulk heating oil storage facility carries with it a myriad of constant responsibilities and costs, but also profit potential. Because oil market volatility and price levels have turned your business into more of a financial planning exercise, it is time for bulk storage owners to carefully review how they are managing their storage to make sure they can reap the most financial value from this costly asset.
The Traditional View
The longstanding benefits of bulk storage ownership for dealers of all sizes include protection against supply disruptions, more efficient operations and hedging of pricing program offerings with ‘peace of mind” in-tank product. Although there have been no significant supply disruptions in recent years, the alternatives available to the owners of storage facilities have long been a luxury that becomes a necessity during challenging times.
The conditions that heating oil dealers now face’from the loss of market share to other fuels to increased customer price sensitivity’demand that any and all avenues to responsibly capture profitability be exploited. As a result, a new, expanded view of the benefits of storage ownership should take hold as storage facility owners plan for the future.
The Expanded View
Virtually all dealers will admit that managing the financial aspects of their business’particularly the administration of pricing programs’has required more attention and focus in recent years. To use a football analogy, most dealers now understand the importance of ‘playing defense” to protect against swings in pricing that can damage profits relative to customers on pricing programs. However, how many storage owners truly ‘play offense” by recognizing and capitalizing on opportunities available to them because they own storage?
By capitalizing on market opportunities, we do not mean taking a speculative position in inventory or otherwise, but instead positioning the company to be able to actively manage storage positions to maximize profits and reduce risks. The resulting profit can benefit the company’s bottom line significantly. Dealers can capture additional margin through transactions that capture market ‘carry” without adding risk to the overall operation. For many years, larger dealers and suppliers with the staff resources and significant storage volumes have utilized straightforward hedging techniques to capture these market opportunities when they present themselves. Now is the time for small and mid-sized dealers with storage facilities to take the initiative and do the same to maximize their existing investment in their storage assets.
For some dealers, this may involve simply learning to recognize and act on market signals that create profit opportunities. Dealers can then work with a hedging services provider to properly execute a strategy on all or a portion of in-tank heating oil. For most dealers with storage, however, it will also involve establishing a supplemental capital source and developing a long term plan to improve cash availability in the spring and summer months when these market opportunities periodically present themselves.
One thing is certain, dealers of all sizes need to ‘play more offense” in managing their storage assets to generate more profits. This means dealers must be ready to identify market opportunities, have a plan with their hedging partner ready to go and have the capital available to execute! Dealers who have these steps in place are positioned to see profits where they used to only see costs.
Matthew Ide is the managing director and Jeffrey Simpson is the director of the Energy Advisory & Finance Group at RenRe Energy Advisors Ltd. (REAL). REAL engages in a variety of non-insurance businesses centered on the weather and financial markets, with a particular focus on weather-centric commodity price risk. The company supports the fuel distribution industry with an array of products, including risk management solutions and customized financial advisory and working capital solutions directed to the retail fuel distribution industry. REAL is a wholly-owned subsidiary of RenaissanceRe Holding Ltd. (NYSE: RNR), a global provider of reinsurance and insurance. Matt can be reached at mji@renre.com and Jeff can be reached at jts@renre.com.