Barclays’ Super Track notes tied to SPDR S&P Oil & Gas offer bullish bet amid sell-off

By Emma Trincal

New York, July 8 – As oil prices recently dropped Barclays Bank plc plans to price 0% buffered Super Track notes due July 31, 2017 linked to the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund, a deal seen as a value play for mildly bullish investors.

The payout at maturity will be par plus double any index gain, up to a maximum return of 22% to 30%. The exact cap will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

The S&P Oil & Gas Exploration & Production Select Industry index fund tracks the performance of the oil and gas exploration and production sector in the United States.

Some of the top 10 holdings include Magnum Hunter Resources Corp., Valero Energy Corp., Marathon Petroleum Corp. and Phillips 66.

Stock bet

“It’s a simple play on the depressed energy sector,” a structurer said.

“They see an appetite for the use of stocks in energy rather than commodities because of the forward curve in commodities is expensive.

“In general it’s easier to price oil deals as an equity product. Investors are more open to buy that than to buy a pure commodity note.

Headline-driven sell-off

Since the second half of June, oil prices have sharply declined, he said.

“People are worried about Chinese stocks plummeting and the Greek crisis in Europe.”

Chinese stock prices are down by more than 30% since mid-June.

“People are concerned about a global slowdown. Meanwhile recent reports show that U.S. inventories continue to build up. Fracking is fracking. Companies continue to produce energy in the U.S. People have tried to pick the bottom and prices have been up in the spring. But for now, supply and demand are putting energy prices under a lot of pressure.”

Another factor pushing down oil prices is traders’ fears over a possible deal between the U.S. and Iran, sources said. Such a deal would lift economic sanctions and cause Iran to resume its oil exports, making the current oil overhang even worse.

China factor

Matthew Bradbard, director at RCM Alternatives, an introducing broker specializing in managed futures, said the sell-off has been especially felt recently.

In a range

“A lot has been happening in the last couple of weeks. WTI crude oil is down 14%. Prices this year have been trading in a $20 range. We’re now smack in the middle of that range. Your guess is as good as mine,” he said.

The price of WTI crude oil – the West Texas Intermediate oil benchmark – closed at $51.80 per barrel on Wednesday. This year’s high was at $62.58 on May 6. The lows were hit on March 18 at $42.03.

“So we’re in mid-range. I was bearish so far but I started to close some bearish positions. I’m moving more neutral. If I was in and out of the trade in the next 30 days I would still be short. Over a longer period of time, over a couple of years it will probably be higher,” he said.

“China is in a bear market. The sell-off had a lot to do with that across all types of commodities. Agriculture was hit. Metals was hit. Energy was hit.

“Right now I’m neutral, but if I was forced to, I’d rather take a bearish than bullish position.

“That said, I don’t see an implosion to $30 or even to the lows of March. I think the sell-off right now is an overreaction to China.”

Risk reward

The notes with a leverage factor or two and a cap potentially as low as 22% are not designed for bullish investors, he said.

“That’s a 5% annual return. When I invest I look for a lot better than 5% or I wouldn’t take any position at all,” he said.

“But this is not the worst thing I’ve seen. The fact that there is a 10% buffer and that at least you’re getting a little bit upside is not bad, assuming exploration stocks are somewhat correlated to oil.

“It’s feasible that oil would go to $70 or $80 in the next 24 months. I wouldn’t want to cap my return at 22% or even higher. If I put one dollar at risk I’m looking to make two or three dollars.

“But meanwhile oil is going to trade in a range, up and down and up and down like shark teeth.

“The risk-reward of the notes is not terrible if you think you’ll be stuck in a range bound market for a while.”

Barclays is the agent.

The notes will price on July 28 and settle on July 31.

The Cusip number is 06741UZT4.

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