Energy Hedging & Risk Management Case Studies

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Cruise Line Implements Successful Bunker Fuel Hedging Program

Client

A privately held, cruise line

The Situation

The company's board of directors engaged us to assist them to develop, implement and manage a bunker fuel hedging program.  The company’s board of directors declared this a critical project as bunker fuel is the company's largest, variable cost and their previous attempts to hedge their fuel price exposure were unsuccessful.

Our Role

  • Conducted several meetings during which the board of directors and senior management were interviewed about their fuel hedging goals and objectives as well as the capabilities of their existing staff and systems
  • Developed an official fuel hedging policy as well as an accompanying procedural manual
  • Performed quantitative and qualitative analysis of the company’s global bunker fuel exposure including price, basis, credit and operational risks
  • Facilitated new relationships with several hedging counter-parties
  • Constructed a framework which would allow the company’s existing staff, combined with our ongoing assistance, to effectively implement and manage the fuel hedging program

Results

By implementing the policy, procures and framework we helped the client develop, the company now has implemented a successful bunker fuel hedging program which allows them to accurately and efficiently manage their exposure to volatile bunker fuel prices.

Commercial Airline Improves Results of Jet Fuel Hedging Program

Client

A publicly traded, commercial airline

The Situation

The client’s management team engaged us to perform an in-depth review of the company’s jet fuel hedging and risk management program.  The company’s board of directors, management team and treasury department were keen to have this review conduced as there were concerns that their hedging and risk management program was not as robust as they believed it should be, despite having performed fairly well in recent quarters.

Our Role

  • Conducted several meetings during which the CEO, CFO and treasury staff were interviewed about their fuel hedging policy, processes, goals and objectives
  • Performed a multi-phased detailed review of the company’s fuel risk management policy, manuals and practices
  • Prepared an in-depth report identifying ways in which the company could improve their fuel hedging and risk management program
  • Providing the board of directors, management team and treasury staff with ongoing, fuel hedging and risk management advisory services

Results

By implementing the changes suggested by Mercatus Energy Advisors, the client has been able to improve the quality of its fuel hedging and risk management policy, establish a more effective fuel price forecasting and fuel price risk management framework and improve the overall efficiency and results of its fuel hedging and risk management program.

Natural Gas Producer is Well Hedged, Refocused on Core Business

Client

A privately held, natural gas producer.

The Challenge

For over a decade, our Client had been hedging their natural gas production with a leading natural gas marketing company and, historically, was very satisfied with the relationship as well as the hedging instruments and prices offered by the marketing company.  However, when faced with a challenging economic and lending environment, the marketing company was forced to reduce our Client’s credit line as the marketing company’s own credit lines had been drastically reduced by their lenders.  Making the matter worse, our Client’s existing hedge positions were set to expire in the coming months.  The economic environment had led many banks and trading companies to cease accepting new hedging customers and our Client had no prospects for an alternative hedge provider(s).

The Solution

Within days of the first conversation with our Client, we assessed their hedging goals and objectives, quantified their hedging requirements and facilitated introductions to over a dozen potential counterparties, none of which were previously known to our Client.  Within 60 days of being contacted by our Client, we were able to assist them in forging a relationship and line of credit with a well capitalized counterparty that also happens to offer unparalled customer service.  The new relationship and line of credit have led to the establishment of a revamped hedging program for our Client.

The Results

Working with Mercatus Energy Advisors and the new counterparty, our Client once again has a solid natural gas hedging program in place.  Knowing that their revenues and cash flow are once again predictable, our Client has been able to return their focus to their core business of drilling for and producing natural gas.

Furthermore, since engaging Mercatus Energy Advisors, our Client’s hedging program is significantly outperforming their internal benchmarks, and the company is well positioned to produce even stronger results in the future.

Pharmaceutical Company Lowers Propane Cost While Mitigating Price Risk

Client

A publicly traded pharmaceutical company

The Challenge

Our Client has numerous facilities across the United States, many of which consume large volumes of propane.  Historically our Client's individual facility managers were responsible for managing their facility's propane supply and the associated costs.  As a result, the company's propane procurement process was inefficient and hindered the company's ability to manage their exposure to volatile propane prices.

The Solution

Our Client desired a solution to improve their propane procurement process, ensure that their propane costs are competitive and to develop a propane hedging program.  We then worked with the Client to develop and implement a system that would allow them to “outsource” the management of their propane procurement and risk management functions to the Mercatus Energy Advisors team.

The Results

Since we began working with our Client, we have helped them implement a centralized propane procurement process as well as a propane price risk management program.  The combination of the two initiatives ensures that our Client's propane supply is reliable and economic, mitigates their exposure to volatile propane prices and allows them to accurately forecast their current and future propane costs. 

Petroleum Marketer Improves Margins & Gains Market Share With New Supply & Risk Management Initiatives

Client

A privately held, petroleum marketer

The Challenge

Our Client markets bio-diesel, diesel fuel, gasoline, heating oil, kerosene and propane to commercial and industrial end-users as well as residential consumers.  As a value added service, our Client offers their customers price protection (fixed and capped prices) programs via financial derivatives embedded into physical supply contracts.

While our Client had all of the internal resources to successfully market these programs to their customers, they lacked the expertise and experience to manage the supply contracts or hedge portfolios which are required to properly manage the price protection programs. As a result, our Client was exposed to significant price, operational, basis and credit risk that they couldn’t manage in-house, which caused a long list of problems, including declining profit margins and cash flow issues.

The Solution

Our Client desired to "outsource" the supply and risk management functions of their price protection programs.  We worked with the Client to develop and implement a system that would allow them to outsource the management of their supply and risk management requirement to the Mercatus Energy Advisors team.

The Results

Since engaging Mercatus Energy Advisors, our Client's supply and risk management initiatives have allowed them to increase their profit margins and gain significant market share. Furthermore, our Client knows that their risks are being properly managed, which allows them to accurately forecast their revenues, cash flows and profit margins.

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