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After the UN resolution on no-fly zone in Libya, the coalition forces just launched an almost full-scale operation on Libya. I was watching Euronews to get latest updates on the Libyan crises. Obviously, this is not a single operation that will last for a couple of days. Libya is on fire! We might see a full-scale war in Libya that will last for weeks or months or even years.

After learning a smart lesson in Iraq, France is trying to lead the coalition forces with 20 aircraft and a number of warships. Gaddafi's spokesman said that he is ready to die for his country (which might happen soon). Gaddafi is not a man different than Saddam. He is living in a different world than ours. His megalomaniac character might push him to behave totally irrationally, and unexpectedly. I am not an expert on oil prices, but here is what happened to oil prices after the Iraq war, also known as, “Operation Iraqi Freedom”:

Naturally, changes in crude oil price are quickly reflected in the retail gasoline prices: Gasoline is now at a national average of $3.56 a gallon. Two years ago, the national average retail price was $1.90.

The graphs explain themselves; there is no need to make any comments. Whenever there is uncertainty in any oil-producing country, speculators, manipulators and all kinds of profit-hunger players bet on oil, rising up the prices. The forces of demand and supply are not enough to justify the fourfold increase in the last decade. I remember the times that I used fill up my Ford's (NYSE:F) 15 gallon tank with only $20. Right now, a significant proportion of my income goes to gasoline purchases. Nobody wants to worry about how to fill their tanks tomorrow. What can we do about rising oil prices?

One solution is to invest in energy stocks. While the increasing gasoline costs are not good for consumers, they benefit those who invest in energy stocks. The best hedge against retail oil prices are the energy stocks that have the highest correlation with them. Therefore, I decided to compute the Pearson Correlation coefficient between all major oil related stocks and retail oil prices. This coefficient shows how two variables are related. A value close to 1 implies perfect positive correlation and a correlation coefficient close to 0 implies no correlation at all. Analysis results based on weekly data from the last 2 years are reported. Oil price data is obtained from U.S. Energy Information Administration, and stock price data is taken from Yahoo Finance. Here, are the results for the major integrated energy stocks:

Major Integrated Oil & Gas Companies

Company

Ticker

P/E

Dividend Yield

Pearson Correlation

PetroChina Co. Ltd.

PTR

11.91

3.08%

0.892

ConocoPhillips

COP

10.19

3.40%

0.796

Petrobras Energ

PBR

15.94

3.05%

0.788

Chevron Corp.

CVX

11.1

2.74%

0.783

EnCana Corp.

ECA

17.36

2.30%

0.753

Total SA

TOT

8.85

5.28%

0.579

Eni SpA

E

9.74

5.64%

0.563

BP plc

BP

3.67%

0.311

Average

12.15

3.65

0.68

While Petrochina and Petrobras stocks are highly correlated to retail gasoline prices, BP is the least correlated. If we use 20 years of data instead of 2 years for BP, we observe much higher correlation coefficient of 0.83. BP stocks seem to be out their long-term track, recently. BP's oil spill disaster had an extremely negative effect in both earnings and stock prices. Therefore, the stockholders could not benefit from the extreme recovery in oil prices. Let's look at the correlation coefficient for Oil & Gas Refining & Marketing companies:

Oil & Gas Refining & Marketing Companies

Company

Ticker

P/E

Dividend Yield

Pearson Correlation

Ferrellgas Partners LP

FGP

7.73%

0.885

Ultrapar Holdings Inc.

UGP

22.01

2.88%

0.870

BP Prudhoe Bay

BPT

13.52

7.54%

0.810

Murphy Oil Corporation

MUR

17.25

1.54%

0.798

InterOil Corporation

IOC

0.790

Marathon Oil

MRO

14.36

1.93%

0.781

Imperial Oil Ltd.

IMO

19.68

0.85%

0.772

CVR Energy, Inc.

CVI

129.75

0.724

Holly Corporation

HOC

29.8

1.04%

0.685

Hess Corporation

HES

12.66

0.49%

0.548

Frontier Oil Corp.

FTO

79.37

0.86%

0.443

Sunoco Inc.

SUN

21.01

1.35%

0.336

Tesoro Corporation

TSO

0.268

Valero Energy Corp.

VLO

17.36

0.71%

0.222

Western Refining

WNR

-0.200

Average

32.81

2.28%

0.602

Ferrellgas, Ultrapar, and BP Prudhoe Bay have the highest Pearson Correlation coefficients. It is worth to emphasize that BP's Prudhoe Bay Trust ranks third. Since the BP Prudhoe Bay is a loyalty trust, any increase in oil prices, has a direct effect on the future earnings of the company. Murphy, Interoil, and Marathon are also highly correlated with retail gasoline prices. Top companies also paid substantial dividends last year. The yields for Ferrellgas, Ultrapar, and BP Prudhoe were 7.73%, 2.88%, and 7.54%, respectively.

Click here for part 2.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Best Hedge Against Rising Oil Prices: Part 1