Summit's guidance helps manage diesel risk exposure
A large construction company successfully hedged its diesel risk thanks to Summit Energy's recommendation of options and swaps.
Leadership on structuring hedges for short-term needs and long-term project bids: Diesel prices are a source of uncertainty that requires careful risk management in the construction field. Price fluctuations impact both ongoing operations and individual bid projects. A hedge strategy based on an understanding of future market performance is critical, and accurate long-term price forecasts enable attractive bid pricing and profitability.
A large, publicly-traded construction company in the western U.S. needed help managing its exposure to fluctuating diesel pricing for its operation sites. Additionally, it needed accurate long-term pricing forecasts to provide competitive bids on large projects. The company uses 5 to 6 million gallons of diesel annually at 15 to 20 sites. Its bid projects, primarily transportation infrastructure and construction materials manufacturing, range from $500,000 to more than $100 million.
The company partnered with Summit to develop a diesel risk management strategy . Company executives were willing to accept some market risk to achieve more favorable pricing, and risk exposure is generally higher during the summer months (April-October), a period in which the company uses 75% of its annual total. Summit recommended a combination of options and swaps to hedge diesel risk that typically covers up to one year forward.
The company followed Summit’s recommendations on market level-dependent coverage levels. While the company executes its own hedges, Summit tracks the reporting to ensure compliance with the overall risk management strategy. Summit also provides regular updates on market issues, such as supply-demand drivers, and short-term technical analysis to fine-tune the timing and price targets of proposed hedges.
In early 2011, with diesel prices climbing, Summit recommended adding coverage against an upside price breakout to protect the client from subsequent price increases. The client avoided a price hike of 50 cents a gallon, which was sustained for three to four months. The company also tapped Summit to work with its financial advisers to develop a hedge strategy and diesel cost estimate for a large, multi-year project bid. Summit proposed a combination of heating, ULSD and crude oil swaps to ensure adequate market liquidity and price transparency through the lengthy project period.