The third installment of our series on bunker hedging will focus on the final two major reasons why companies, government agencies and 'not-for-profit' corporations should manage their fuel price risk.
#5: Attract quality investors
Attracting quality investors is tremendously important, whether it is a long-term institutional asset manager or pension fund buying shares in a publicly-traded company, or a private equity firm or hedge fund taking a significant stake in a privately-held company.
These investors are not just looking for exposure to an industry that will help them meet their return targets; they are looking for a best-in-class management team or a company with operations they believe to be significantly better than those of others within that cohort.
companies with unhedged fuel exposure can effectively act like an inverse proxy for global oil markets
Take for example the significant amount of private equity money that has been put to work in the shipping industry.
These P.E. funds believe vessel prices and day rates have been at the bottom of the cycle and both will see an upswing in coming years as economic activity improves.
Their return model is based on improving asset prices and stronger charter revenues. They are not looking for commodity exposure that could potentially erode their return on investment.
Given the high percentage of costs accounted for by fuel expenditure, companies with unhedged fuel exposure can effectively act like an inverse proxy for global oil markets.
By having a plan in place to address these risks and remove some uncertainty from their business model, companies can position themselves as a more attractive investment option than their peers.
#6: Taxpayer protection
In recent years, with varying degrees of austerity sweeping through national and municipal level budgets alike, it has never been more important for government agencies to deliver services 'on budget'.
Without a hedging strategy, these agencies retain significant cost uncertainty
Whether it be commuter ferry services, lifeline ferry services, or coastguard/naval departments, agencies at the local and federal level have significant fuel expenditures and are exposed to this price volatility in the same way as public or private companies.
Similar to corporate executives, the administrators and officers of these agencies are charged with effectively running their departments and delivering a quality public service while remaining within pre-defined spending limits.
Without a hedging strategy, these agencies retain significant cost uncertainty and needlessly expose taxpayers to volatile global oil markets.
Christopher Cheetham is the President and Co-founder of Soter Advisors Ltd