Builders, Landscapers Use Pricelock to Hedge Fuel Like Southwest
The last time U.S. gasoline prices approached $4 a gallon, in May 2008, Chrysler offered new car buyers a payment card that would let them purchase gas at $2.99 a gallon for three years. The promotion didn’t halt Chrysler’s sales slide, down about a third from the year before. Most buyers chose other incentives, such as cash rebates, over the gas card. Customers who did take the discount saw market prices drop below their guaranteed price after the financial crisis. Refuel America, as the campaign was called, may have done more for Pricelock, the Redwood City (Calif.) fuel hedging company that engineered it, than for car buyers or for Chrysler, which filed for bankruptcy the next year.
Today Pricelock is trying to parlay its promotions with automakers into a broader business selling price protection to small and midsize companies that don’t buy enough fuel on their own to hedge in the futures markets. Founded in 2007, the 40- employee company has 24,500 fuel-card customers from the promotion with Chrysler and a similar one with Hyundai the following year. An additional 500 small businesses, such as building contractors, landscapers, and tow operators, pay Pricelock directly to control their fuel costs.
“They’re trying to take the mystery out of hedging and making it easy and attracting more people who should be hedging,” says Phil Flynn, senior market analyst at PFG Best, a futures brokerage. “It’s not high prices that normally kill a business. It’s uncertainty in price and volatility.”
Now, with the cost of a gallon of gas nearly a dollar higher than it was a year ago, demand from small companies that want to manage their fuel costs has tripled since last year, according to Naveen Agarwal, Pricelock’s chief operating officer. The company forecasts revenue this year to more than double, to $12 million, Agarwal says, and it expects to be profitable by the end of 2012. Some big names are betting on the idea: In March, Pricelock raised $12 million in series B financing from Barclays, RenaissanceRe, Travelers -- all companies it buys hedges from as well -- and venture capital firm Artiman Ventures, bringing its total outside investment to $22 million. (Goldman Sachs, another trading partner, invested in the first round.)
HOW THE HEDGING WORKS
On Pricelock’s website, businesses enter the size of their fleets, the number of miles they drive, and their average miles per gallon. Then they choose what maximum price they want to pay -- based on the national average price for regular gasoline or diesel -- and for how long. Pricelock charges a premium for the plan. If gas prices rise above the level selected in any month of the contract, Pricelock pays business owners the difference. If prices fall, customers lose their premiums but can still take advantage of lower prices at the pump. (The company uses federal data for the national average price at the pump and helps customers adjust their plans for regional differences.)
For example, to protect 1,000 gallons a month for three months at a price of $3.85 -- about the national average on Apr. 18 -- would cost a premium of $749.50, according to a quote on the site obtained Apr. 21. At that rate, borrowers would save more than the cost of the premium if average gas prices for the three-month period rose to $4.10, according to the site’s online calculator.
Business customers typically have between five and 100 vehicles. A handful have a few thousand. Pricelock bundles smaller orders from these fleets into deals large enough to buy futures contracts tied to the price of gasoline or diesel in volumes of 21,000 gallons per month or more. Agarwal says Pricelock typically charges customers 5 percent above its own cost of hedging. In any given month, Pricelock insures between a few hundred thousand and a few million gallons. Pricelock offsets its own risk with contracts from banks and insurers -- many of which have also invested in the company.
BIG TECHNIQUES FOR SMALL FRY
“We want to empower [small companies] with the same risk management and the hedging tools that the large guys have,” says Agarwal, a former president of E*Trade Capital Management who joined Pricelock in February 2009. Agarwal cites the success of companies such as Southwest Airlines that use hedges to manage costs during oil price spikes. The risk to Pricelock’s customers is that prices will hold or drop after they buy price protection, as they did for Chrysler customers, who saw gas prices peak the summer after the promotion and drop below $3 that autumn.
Most small companies have few options to blunt the impact of higher gas prices, says Paul Lauria, president of Mercury Associates, a fleet management consultant in Gaithersburg, Md. While some transportation businesses can pass fuel surcharges along to their customers, most companies have to absorb increases. The value of a service like Pricelock “comes down to how well an organization is equipped to deal with rising fuel prices,” he says. “What you’re insuring is your budget against undesirable or unmanageable spikes.”
To expand, Pricelock plans to help companies hedge other fuel costs, such as natural gas or electric power, by the first quarter of next year. Building the system to track prices and handle such transactions is the challenge, says Agarwal: “Doing a car program [such as Refuel America] is much easier.”
To contact the reporter on this story: John Tozzi at jtozzi2@bloomberg.net
To contact the editor responsible for this story: Nick Leiber at nleiber@bloomberg.net
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