What would it be like to enter a season, or even a year of fuel buying knowing your margins were securely protected? That is exactly what many marketers in the nation are doing, and it’s exactly why Meridian has asked Darren Dohme of Powerline Petroleum to be one of the featured guest speakers at this year’s Focus on Finance. The best way to illustrate what can and is being done with margins is with a real life situation.
A retailer in the Southeast wanted to “try” a margin protection strategy. What they wanted most was to protect against rack price increases, but also have some reimbursement if prices declined. Not totally comfortable yet with a protection strategy, and with Powerline’s conservative recommendation, they decided to try Powerline’s Margin Enhancement Program® (MEP) on 20% of their fuel.
The MEP would allow the chain complete protection on the upside, but if the market made a large decline, they would have to own twice the volume of fuel to stay at even pricing. They were agreeable to this risk.
Using the Gulf Coast market as their basis, the chain entered the market April 30, 2003. On that date, a 10-cent maximum potential payout could be entered at 74.5 cents.
Now here are the economics. At a range of 69.50 to 70.49 cents, the chain would completely break even. Any price above that level, they would earn incremental two-cent profits up to a total 10 cents at 74.5 cents or higher. For the downside, they would pay a premium of 2 cents for every penny drop in fuel. At the time, they were confident that the market wouldn’t decline severely and that assumption turned out to be correct. The results were exciting!
The actual fuel prices over their five-month contract were 78.6 cents in May, 82.7 in June, 88.5 in July, 98.3 in August, and 80.8 in September. Each month of the contract, they earned their full 10 cents.
By using this program, and remember they were only working on 20% of their total fuel purchases, they increased their overall company-wide gasoline margin by 67% in May, 33% in June, 40% in July, 40% in August and 11% in September. They were typically working on 3 to 5 cent margins. Put into hard dollars, the MEP program produced an extra $600,000 per month or $3,000,000 over the five-month life of this program!
Check out the terrific data charting MEP program profits with the OPIS reported average retail margin. The average MEP payback over the past three years (with only 20% of fuel purchases participation — remember Darren likes to stay conservative!) was 2.4 cents per gallon! Could you have used an extra 2.4 cents per gallon on all your gas gallons sold over the last three years? Think of the dollars!
It’s Not Just for Gasoline
Price risk strategies work equally well for diesel, propane, and heating fuel. One of the more interesting Powerline recent offerings was a min/max program for 2004-2005 propane. When outright calls for 58 cents were running 9.25 cents per gallon, you could instead lock in a 15 cent upside and 5-cent downside for only 5 cents. That gave marketers guaranteed profitably within a 20-cent range!
It’s important to note that these programs must be monitored. Markets fluctuate daily and you must stay in touch. If you are not in the practice of actively, daily managing your fuel and pricing, these programs may not be for you.
For additional information from Darren and Powerline right away, call 888-605-6051.
