Hedge Insite is a risk management tool that helps fuel marketers peer into the future and evaluate their hedging positions and improve profitability. Oil & Energy recently caught up with Hedge Insite’s managing partner Richard Larkin to learn more about the software.
Please recount the origins of Hedge Insite. What were you setting out to do when you developed the software?
The idea for Hedge Insite originated from worksheets we had developed internally at Hedge Solutions that had evolved over the 15-year history of the company at that time. The origins go back as far as 1993 when I was using Lotus to track my clients’ positions. After trying out different software environments like Excel and Access, we were approached with the idea of developing a [software as a service (Saas)] application that would allow the user to see the forward profit and loss (P&L), stress different strategies, and track their positions. For my consulting company, Hedge Solutions, it provided a platform that we could manage our clients’ hedging and procurement strategies on. Also, we could protect our trade secret methodologies for hedging while simultaneously providing transparency on the results to the end user.
Please discuss Insite’s price forecasting. What does it do?
To be clear, Hedge Insite does not forecast oil or propane prices (LOL). Put simply, Hedge Insite allows the user to run simulations of future revenue and cost streams and thereby estimate profitability. On the revenue side, the user can enter any kind of forward sales offers; cap, fixed, variable, index pricing, minimum/maximum pricing. On the cost side, the hedging strategy is input: wet barrels, options, futures contracts, swaps, etc. It will also allow you to consider inventory as a hedge by moving it forward against the calendar. All the variables that can impact your cost of sales and ultimately your profit margin are factored into the software: basis, weather, etc. Once you input your information, the software will give you over 240 iterations based on the movement of the underlying commodity price and display the results on a simple line graph. A flat line indicates that you will achieve your margin goal no matter what the price does. A line that tilts to the left or right indicates that you may fall short or possibly exceed your margin forecast based on the same price movement. Hedge Insite complements the back office host system by providing a forward view of where the company is headed.
What is “stressing” in Hedge Insite, and why is it important?
The “stress test” as it is named in the software, allows the user to manipulate the data in the program without impacting the original inputs and results from those inputs. The stresser enables the user to “test” a variety of hedging strategies to evaluate their impact to the bottom line before making a decision. It removes the guesswork. The stress test function also enables the user to stay on forecast month to month, but if and when events take the user “off course” the tools in the software help him define the best tactics for “returning to the desired P&L course.”
I like to call it a practice area. It virtually duplicates the original Hedge Insite environment in a separate “view” or window. You can then change the variables that might impact your forecast for profit so that you can test a certain strategy or simply see what impact the changes made will have on your P&L. Some examples are:
- You can add wet barrels and graph the result.
- You can increase or decrease the volume of sales in a way that will simulate a change in weather; and then graph the result.
- You can change your basis assumption or rack to posted profit forecast in order to see what that impact would have on your P&L.
There really is no limit to what you can “stress.” But when you are done, you simply close out of the stresser and go back to the protected core data.
How does the customer’s information get entered into Insite?
Information is entered through intuitive data entry screens. The fields are labeled, making it easy to identify what information should go in there. For example: when entering a call option: the data entry screen will have the following pre-labeled fields: date, delivery month, market month, gallons, strike price, and premium. Other fields are optional such as description, supplier/broker, code, etc.
How does Hedge Insite interact with back-end office software?
Hedge Insite has the capability to connect to most popular software vendors using a CSV file format. Import/export of data is handled through a standard CSV file format.
How do customers access and use Insite?
Hedge Insite uses a subscription-based software model. Because it is a Saas application, the software is easily downloaded onto the desktop. The data is stored on professionally hosted, remote and secure servers. From the desktop the program is accessed by username and password.
Do you have to be a Hedge Solutions customer to use it?
You do not have to be a client of Hedge Solutions.
Please describe any recent enhancements to Hedge Insite as well as any important changes made since it was launched.
As the saying goes, if it ain’t broke… (laugh) What enhancements that have been added are subtle. On a serious note, I can count on one hand the amount of support calls that we’ve had in the six years that the software has been out there. It is quite remarkable, really. The decision to build the application on a platform called Progress, though costly up front, has proven to be prophetic in hindsight. It is lightning fast and simply does not break down. It has been so dependable that we have been reluctant to move it off of the original platform or make too many changes. We do have plans to add enhancements as well as other partners with the goal of broadening the product offering. Currently it handles all distillates, propane, and gasoline.
How can an energy company benefit from using Hedge Insite?
To be able to accurately and confidently forecast profit margins. The benefits of using the software are numerous: precise, accurate forecasting of profit margins, flexibility, speed, reliability, unique stressing capabilities, data storage for historic comparisons, degree day data, and audit capabilities.
Do you maintain and develop Hedge Insite in-house or with outside help?
We do not maintain Hedge Insite in-house, and that’s a good thing. Hedge Insite is hosted with a reputable outside vendor that maintains a robust framework and back-up protocol that protects the integrity of the data and guarantees uninterruptible access and service.
What are your future plans for the software?
I look forward to the future of Hedge Insite! We have several exciting ideas currently in the lab, if you will … that I can’t discuss or reveal. One attribute that we won’t change, however, is the reliability and integrity that has earned it the unblemished reputation that it continuously enjoys year after year.
