What is the correlation coefficient?
In this series, we have analyzed Delek US Holdings’ (DK) stock movements, business segments, leverage, cash flows, and valuations. In this concluding part, we will test the correlation between DK’s stock performance, the broader market indicator, and crude oil prices.
The correlation coefficient shows the relationship between two variables. A correlation coefficient value of 0–1 shows a positive correlation. Zero states no correlation, and -1–0 shows an inverse correlation. We have considered past five-year price history of DK, the SPDR S&P 500 ETF (SPY), WTI, and Brent.
Correlation analysis: DK, crude oil prices, and SPY
The correlation coefficient of Delek versus WTI and Brent stands at -0.39 and -0.48, respectively. The correlation values for DK and oil prices indicate that stock prices of DK move inversely compared to oil prices.
In comparison with a broader market indicator, the SPDR S&P 500 ETF (SPY), DK’s stock shows a strong positive correlation of 0.78. That means that around 78% movement in DK’s stock price can be explained by movement in SPY.
Delek’s peer correlation analysis
Delek US Holdings’ (DK) peer Valero Energy (VLO) shows a higher negative correlation to Brent. The correlation of VLO versus Brent stands at -0.73. Also, Marathon Petroleum (MPC) and Tesoro (TSO) show a strong negative correlation of -0.68 and -0.84 to Brent, respectively. The Energy Select Sector SPDR ETF (XLE) has MPC, TSO, and VLO in its portfolio.
In analyzing an integrated energy company, it is observed that the correlation with oil prices is lower than a downstream company. A case in point is ExxonMobil (XOM), an integrated energy giant that has a 0.23 correlation with Brent. This means that stock prices of integrated energy companies, due to their amalgamated upstream and downstream segments, show lower positive correlation to oil prices compared to standalone downstream firms.