What is correlation coefficient?
In this series, we’ve analyzed Phillips 66’s (PSX) stock movements, business segments, leverage, cash flows, and valuations. In this final part, we’ll test the correlation between Phillips 66 and crude oil prices.
Correlation coefficient shows the relationship between two variables. A correlation coefficient value of 0 to 1 shows a positive correlation. Zero states no correlation, and -1 to 0 shows an inverse correlation. In our analysis, we’ve considered the past 12-month price history of PSX and WTI (West Texas Intermediate).
Phillips 66 and crude oil prices
The correlation coefficient of Phillips 66 (PSX) and WTI stands at 0.45x. The correlation value of Phillips 66 (PSX) and crude oil prices shows that the price of PSX stock moves in line with WTI prices to a certain extent. This means that around 45% of the movement in Phillips 66’s stock price can be explained by changes in oil prices.
Peer correlation analysis
The same is true for PSX’s peer Valero Energy (VLO). The correlation of VLO versus WTI stands at 0.19. Other downstream players such as Marathon Petroleum (MPC) and Alon USA Energy (ALJ) have an even sharper correlation of 0.29 and 0.36, respectively, to WTI.
But on analyzing an integrated energy company, we should remember that the correlation to oil prices is higher than a downstream company. A case in point is Statoil (STO), an integrated energy giant with a 0.73 correlation to WTI.
If you’re looking for exposure to refining and marketing sector stocks, you can consider the iShares US Oil & Gas Exploration & Production ETF (IEO). The ETF has ~22% exposure to refining sector stocks.