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Saturday, September 17, 2005

Hedging Against Energy Prices, Part 1:Exxon Stock Performance vs Gas Prices

A review of my current hedging strategy on energy prices.

When I started my job in 2001 one of the strategies I planned with my savings was a hedge on rising energy prices. I ended up investing a modest amount in Exxon and Chevron thinking that if energy prices went up significantly both of these companies would benefit. With my recent attention on gas prices, I thought it would be a good time to review this strategy.


First lets take a look at the price change of Exxon's stock compared to the change in the price of gas. I'll use my estimated historical gas prices from the charts at raleighgasprices.com to track gas performance. I also took historical stock prices from Yahoo!Finance to pull the closing price of Exxon stock on the 1st trading day of each month.



Interesting side note: A quick look at some statistics with this data - I calculate the Pearson Product Moment Correlation Coefficient for this data set as 0.89 (a strong positive correlation). This also suggests that 79% of the stock price change is correlated with the price of gas. Keep in mind the gas prices are estimated and this was done for illustrative purposes only.

This data shows even a better correlation than I expected between Exxon stock and average gas prices in Raleigh. This information could be useful for future planning.

Now lets take a look at my Exxon stock holdings in my DRIP:

Exxon DRIP Account

Investments

Based on 9/14/2005 Stock Price

Year

Invested

Shares

Value

Profit

ROR

2001

$ 602.83

15.049

$ 940.11

$ 337.28

11.75%

2002

$ 520.43

13.733

$ 857.90

$ 337.47

18.13%

2003

$ 588.10

16.494

$1,030.38

$ 442.28

32.36%

2004

$ 99.74

2.313

$ 144.49

$ 44.75

44.87%

2005

$ 40.64

0.672

$ 41.98

$ 1.34

3.30%

Total

$1,851.74

48.261

$3,014.86

$1,163.12

22.08%*


Notes: ROR=Rate of Return; ROR is calculated annually; *Averaged ROR; dividends reinvested are aggregated into yearly "Invested" column; actual ROR is higher because dividends paid are not calculated in ROR.

On the surface I have been averaging a ~22% rate of return (on stock price only) for money invested in Exxon stock, a fantastic return for a blue chip stock. I have obviously benefited well from the Exxon stock price, but how has this helped me to hedge against rising gas price?


First lets see what has happened to my average monthly gas spend since 2001. Since November 2001, my 3 month rolling average has increased $88.75/month, or if things level off, an estimated $1065/year.



My net profit from the Exxon investment (excluding selling costs and taxes) is currently $1,163.12. While my estimated annual gas spend has increased $1065, my net worth has increase more than enough to offset this while still earning a 1.9% dividend. However, this hasn't really helped me hedge against the long term impact of rising gas prices, I have only been able to offset a year's worth of additional gas spend. If gas prices remain the same, I have essentially hedged against paying a year's worth of the gas increases, but nothing more.

In future posts, I'll review my Chevron stock to see if it has performed as well, and I will discuss an idea I have for improving my hedging strategy.

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