What is the correlation coefficient?
In this series, we have analyzed Marathon Petroleum (MPC) stock movements, refining margin, leverage, cash flows, and valuations. In this part, we will examine the correlation between MPC’s stock and oil prices.
The correlation coefficient shows the relationship between two variables. A correlation coefficient value of 0 to 1 shows a positive correlation, 0 states no correlation, and -1 to 0 shows an inverse correlation. We have considered the 12-month price history of Marathon Petroleum and WTI (West Texas Intermediate) crude oil.
MPC’s stock and oil prices
The correlation coefficient of Marathon Petroleum (MPC) and WTI stands at 0.34. The correlation value for MPC’s stock and oil price show that they have a positive but feeble correlation.
The stock of Marathon Petroleum moves in line with WTI prices only to a certain extent. This means that around 34% of the movement in MPC’s stock price can be explained by changes in oil prices.
Marathon Petroleum’s peer correlation analysis
The situation remains the same for MPC’s peer Tesoro (TSO). The correlation of TSO versus WTI stands at 0.27. Among the other downstream players, Western Refining (WNR), Delek US Holdings (DK), Alon USA (ALJ), and Phillips 66 (PSX) show slightly higher correlations of 0.35, 0.37, 0.37, and 0.48 to WTI, respectively.
When analyzing an integrated energy company, it is observed that the correlation to oil prices is higher than with a downstream company. A case in point is Statoil (STO), an integrated energy giant that has a 0.73 correlation with WTI. This is due to the fact that integrated energy companies have upstream operations also along with downstream activities.
An upstream segment’s earning is directly impacted by the level of crude oil price. In fact, in a higher oil price scenario, upstream earnings constitute a major portion of integrated energy companies’ earnings.
If you are looking for exposure to refining sector stocks, you can consider the iShares North American Natural Resources ETF (IGE). The ETF has ~6% exposure to refining and marketing sector stocks.