Everyone I know is an energy user. When you’re a business, energy is often one of the more significant expenses reducing your profit. Farmers, fishermen, and trucking companies consume substantial amounts of diesel fuel and gasoline to power their equipment. Retail entities must run lights, air conditioning, and heating systems, perhaps even refrigeration units. Manufacturers are powering machinery and equipment every single shift. And real estate companies may incur utility costs, depending upon the lease agreements with their tenants. Any businesses with substantial travel budgets are impacted by the cost of jet fuel to airlines, as well as diesel and gasoline costs to power their own fleets. You might say money AND ENERGY make the world go round.
Previously, I’ve explored the operational and hedging considerations of the recent decline in energy prices for both producers and marketers. In this article, I share some ideas on how business users of energy can strategize to maximize their future profits, given the more favorable prices of today’s market.
Strategic ideas for energy users:
1. Lock in your cost. Does the forward market for energy prices offer you price levels below your budget? Consider locking in your cost with long futures, swaps, forwards, or call options.
2. Reassess pricing for your own products and services. You’ve just been given a lower cost structure for your business. That’s good news! Now you need to decide what you are going to do with it. Should you use some of that benefit to increase your business? Will your competitors lower their prices? Is now an opportune time to increase your market share by lowering your prices? Or, is it simply time to hold on and enjoy the ride?
3. Solicit new business. Because of your lower cost structure, consider making new deals with customers. However, don’t be in a hurry to give away your recent windfall. Your memory may remind you of what happens when energy costs increase. Yet, you may be able to entertain business with certain customers for which you could not compete in the past. Reassess the market and seize new opportunities.
4. Consider new products or services. Do lower energy prices allow you to develop new products or services at affordable cost to the consumer?
5. Share the good news! Your lower costs should result in a stronger balance sheet and less costly operating structure. Some of your business partners will share in the benefits. To what extent they share may be up to you, if you’re proactive. Update your financial forecasts and share this information with key business partners. Will your lenders be willing to lower the cost or compliance of your debt? Is now an opportune time to reward shareholders and increase returns to them? Is this an opportunity to attract new capital to expand business. Will vendors grant you more favorable terms? Does your revised forecast qualify you to do business with customers who require their vendors to have stronger financials than you’ve had in the past?
6. Consider cooperative buying programs. If you do not have sufficient demand for energy services, it may be difficult to lock in your cost with market makers or vendors, nor may you be equipped to do so. Is it time to team up with other businesses in order to amass enough energy demand to command better forward pricing?
It may take more than simply blind faith or dumb luck to cash in on the benefits of lower energy prices. With commodities, one thing is certain: today’s price will not be tomorrow’s price. Current prices will not be with us forever. Sure, they could go lower. But don’t get greedy. And don’t be caught flat-footed, assuming that your bottom line in the foreseeable future is secure and profitable.
If you would like to bounce around any of the ideas presented here or in the two previous articles, please feel free to leave a comment or to contact me through the form on the contact page. I look forward to hearing from you.