Oilheat Marketing...
Average and normal is not the same thing
Protecting profits during a normal winter
For industries without much in the way of data
mining or technological innovation, it is often said
that it is an “industry of averages.” The notion of
averages is basically abdication to the need to do something
proactive. Better put, in our industry, “there are
good years and there are bad years.”
I have used this column, of late, to discuss how the
averages and the feeling that good and bad simply even
out is no longer a way to run a business–not if you can
prevent or mitigate the “bad.” You used to be able to say
that some customers will be very profitable, while others
will cost you money. Now, you would use data to tell
you which customers are likely to cost you money and
avoid those. You used to say that some deliveries will be
bigger than you want, and others smaller, but as long as
you don’t run a customer out of oil…now you would use
remote tank monitoring to be sure that you won’t run
someone out, while also avoiding small deliveries.
The two examples above are truly new paradigms in
the world of retail home heat. Data analytics, while
it still has a long way to go, is fairly new to our industry.
Affordable and reliable remote monitoring is also
something that is weaving its way into the mainstream
for dealers, but its future growth is certain. However, I
want to use this space to talk about something that has
been available and affordable for over a decade, but still
not used nearly enough: Managing your volumetric risk.
It is true that some years are colder than average
(although it’s hard to remember those!) and others are
warmer than average (yes, that pain is quite fresh).
However, the notion that the good (cold) offsets the bad
(warm) doesn’t really seem to work,
especially when there might be something
to do about it.
For reference using New York’s
LaGuardia Airport weather station as
a reference point, the 10-year average
for heating degree days (HDD)
Philip J. Baratz
Angus Energy
pbaratz@angusenergy.com
for October through April is 4,237.
Over the last five years, only one was
within 10% of that average. The last
four years have been 17% colder, 17%
colder, 16% warmer, and 12% warmer.
So, while 4,237 might be average, it is
most certainly not normal. (See chart)
Not to say that there are no financial risks to a cold
winter, there most certainly are, but the risks of a warm
winter begs for some consideration. The basic structure
of a fuel distribution company lends towards outsized
amounts of fixed costs. Rent, truck leases, storage tanks,
custom service reps, accounting staff, sales staff, drivers,
service techs, IT infrastructure, etc., lend very little for
seasonal costing. Yes, you do need fewer drivers (and
perhaps fewer service techs), but that doesn’t move the
needle all that much, relative to your fixed overhead.
On the other hand, while enjoying the benefits of service
contract payments, just about all of your revenue is
dependent upon volume, and the volume is linked to the
weather.
Private and public companies, as well as municipalities
/company/angus-energy
/AngusEnergy
@AngusEnergy
and cooperatives, have been buying “weather protection”
for quite a while. As with all protection against
risk, there is a cost to participate. Just like purchasing
an option on the price of heating oil,
there is an active market that you can
use to purchase protection against a
variation in HDDs.
If HDDs, for example, were 10%
lower than the 10-year average, as we
have seen three times in the last six
years, and you had purchased protection
against warm weather, you would
collect a payment to offset part or all of
your losses due to the warm weather.
Conversely, had you paid a premium to
protect against warm weather, and the
weather turned out to be colder than
average, you would lose the cost of the
premium that was paid for the protection.
For many, it is a fair trade-off,
5,000 HDDs
4,800 HDDs
4,600 HDDs
4,400 HDDs
4,200 HDDs
4,000 HDDs
3,800 HDDs
3,600 HDDs
3,400 HDDs
3,200 HDDs
Heating Degree-days, LGA
weather station
07-'08 08-'09 09-'10 10-'11 11-'12 12-'13 13-'14 14-'15 15-'16 16-'17
continues on p. 29 (previous page)
30 ICM/September/October 2017