Fuel Conservation and Management Symposium Bruce Gress Pilot Travel Centers

Fuel Conservation and Management Symposium “Apparently there is nothing that cannot happen today.” Mark Twain

Fuel Conservation and Management Symposium Pilot Travel Centers Overview 302 Locations in 40 States and Canada 14,000+ employees Estimated 2008 total revenue: $17 Billion 4.5 Billion gallons/year –304 company trucks 4 million miles/month 1400 truckloads/day –One load of diesel per minute: 24/7/365 One of the largest fast-food franchisees in the U.S. –Subway’s largest, Wendy’s, Arby’s, McDonalds, Taco Bell

Fuel Conservation and Management Symposium Pilot Travel Centers Overview

Fuel Conservation and Management Symposium Supply & Distribution Structure Retail pricing Trucking –Central Dispatch Supply –Contract supply from refiners (spot & rack) –Spot market bulk purchases, ship –Local rack Trading –Corporate hedging –Customer programs

Fuel Conservation and Management Symposium Trading Why we trade… –Hedge / Protect retail margins –Better information, market intelligence –Being active in the market improves our buying –Innovative customer programs –Profit

Fuel Conservation and Management Symposium Trading What we do… –Lagging retail margins are vulnerable to price trends Price spikes > low retail margins Price declines > high retail margins –Typical: Spike up, drift down –“Hedge with a bias” Trading vs. hedging –Trading: outright play > profit –Hedging: an offsetting position to an inverse gain or loss

Fuel Conservation and Management Symposium Trading How we trade …(non rogue) –Take what the market gives NYMEX length Physical basis Options –Calls, Call spreads –Puts, Put spreads –Fences, Straddles, Strangles, Strudels Swaps –Paper Look-alikes

Fuel Conservation and Management Symposium The Three Petroleum “Al’s” Fundamental Factors Geopolitical Factors Technical Factors

Fuel Conservation and Management Symposium The Three Petroleum “Al’s”

Fuel Conservation and Management Symposium What We’re Seeing…Fundamentals: Supply World oil demand: 2008 = 86.5mmbd, 2007 = 87.4mmbd (EIA) –Growth: ,000 b/d, ,000 b/d OPEC…back in control? –4Q08: 32.8 mmbd, 09: 32.05mmbd –Excess capacity Actual vs. Quota Non-OPEC –2008: mmbd, 2009 growth: +890,000 b/d Refinery Expansion –U.S., Middle East, Far East Renewable Fuels Drill NOW?

Fuel Conservation and Management Symposium What We’re Seeing…Fundamentals: Demand U.S. Demand –-800,000 b/d, 2009: Below 20mmbd for 1 st time in 7 years –Gasoline: MasterCard: -4.3% y/y, EIA: -2.9% y/y Miles driven: June down 13 billion miles (most in 25 years) –Diesel: -7 to -10% (-3 to -4% conservation) Emerging nations: Strong growth, Subsidies China: Oil growth +6 to +7.5%, 1H2008: +400,000 b/d –GDP: %, % India: Oil growth +5.5%, Subsidies gone mad? –GDP: %, % European Union / OECD

Fuel Conservation and Management Symposium What We’re Seeing…Geopolitical Russia –Nationalization –Western belligerence –OPEC cooperation Iran –Anti-Iran economic coalition, perceived threat lessened? Iraq –Exports climbing…2.5mmbd, 3.0 in 2009, 5.0 in 2012? –Western investment Venezuela –U.S. enmity, OPEC price hawk Sell U.S. assets?

Fuel Conservation and Management Symposium What We’re Seeing…Geopolitical Nigeria –8 th largest exporter in the world –Light, sweet crude –MEND terror attacks / kidnappings 25-50% of production offline for 2 years Saudi Arabia –U.S. ally / despotic rule –Iran nemesis –Unilateral increase in exports in June U.S. –New exploration and production –Comprehensive energy plan? –Elections

Fuel Conservation and Management Symposium What We’re Seeing…Technical Chart watching… –What about fundamentals? –Prominent role in fund decision making 6 ½ year Wave 3 is completed ( ) –$18/bbl > $147/bbl –Head fake: summer of 2006 – summer of 2007 at almost $80/bbl Wave 4: until 11/09 –$82/bbl? Wave 5: ?!

Fuel Conservation and Management Symposium Trading In The Old Days Analysis of fundamentals: –Inventory trends –Seasonal physical basis plays –Refinery operations / disruptions –PADD arbitrage –Historical crack values –Demand forecasts U.S. only What worked? –Physical basis differentials –Front to backs

Fuel Conservation and Management Symposium Trading In The New Days The game has changed: Funds –Unprecedented investment > $250B –Across most commodities Coal +150%, Gold +65%, Platinum +80%, Copper +95%, Lead +95%, Corn +140%, Soybeans +105%, Wheat +80% –Direct, swaps, derivatives –Flight from other investments as inflation hedge and high returns –Hedge for weakening US Dollar & interest rates Circular spiral: Interest rate cuts > Weakening USD > Higher oil prices > Economic worry > Interest rate cuts

Fuel Conservation and Management Symposium Trading In The New Days

Fuel Conservation and Management Symposium Trading In The New Days Economist or Trader? –Long term view Short term fundamentals become trivial –World view It’s not just the U.S. anymore Volatility –Momentum players –Get on the bus or under it –Greater risk…greater return Volatility has forced us to short term market predictions –Could oil go to $50? $100? $150? $200+?

Fuel Conservation and Management Symposium What We Do…Examples Upward bias, strong retail margins –Length –Fences (with put at weak margin level) Downward bias, strong retail margins –Length with put insurance –Calls Upward bias, weak retail margins –Calls, call spreads Downward bias, weak retail margins –Out of the money calls –Get the hell out of the way and don’t make it worse Neutral bias, weak retail margins –Covered straddles (in high volatility) –Out of money calls, call spreads Front/backs, up/downs, cracks, physical basis

Fuel Conservation and Management Symposium What You Can Do Understand hedging Understand what you’re trying to accomplish –Does it work for the budget? Lock in fuel price? Float with some insurance? Understand the risk –Play “what if”. Have a game plan. Exit strategy? –Never say “it could never do that” Enter the market prudently –Know your counterparty Ask questions…monthly average or strike price? Will there be margin calls? Can I reverse the deal?

Fuel Conservation and Management Symposium QUESTIONS? Bruce Gress Pilot Travel Centers