Barclays’ Super Track notes tied to oil, gas fund aimed at bulls in risky sector, sources say

By Emma Trincal

New York, March 3 – Barclays Bank plc’s 0% autocallable Super Track notes due March 9, 2017 linked to the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund offer investors the opportunity to capture gains if the bear market in oil turns around, sources said.

The payout includes a one-time autocall with a 15% call premium if the fund closes at or above the call price, 115% of the initial price, on the March 10, 2016 call observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the final share price is greater than the initial price, the payout at maturity will be par plus 1.5 times the fund return.

Investors will receive par if the price falls by up to 20% and will be fully exposed to the decline if it falls by more than 20%.

Oil rally

“If you believe in the recovery in oil, these are good terms,” said Tom Balcom, founder of 1650 Wealth Management.

“It’s a well-diversified fund with none of the top 10 holders above 2% of the total portfolio.”

The price in the past one-year and three-year periods peaked on June 23, 2014 at $84. At about $51, the price is now 40% below that level. From today’s price, the ETF would have to drop to $40.80 to breach the 20% downside threshold, he explained.

“That would be a 52% decline from the peak of last year, and we’re talking two years from now,” he said.

“I’m not saying it’s impossible. This is a volatile fund. But if someone wants to have exposure to oil in the hope of capturing some of the rebound, it’s a trade that makes sense given how much prices have already collapsed since June.

“It could be a rebalancing trade, a recovery trade, depending on how you look at it.”

Balcom said the 80% barrier provides some level of contingent protection, but it could be improved.

“I might do a twin-win instead. You still have a barrier but if the underlying price decreases you might have a positive return as opposed to simply the return of your principal. But it’s fair to say that they offer a nice barrier,” he said.

Upside

As with any autocall provision, one risk to the investor if the fund price increases above 115% is to see the return capped at the premium level.

“You always have that risk,” he said.

“If there’s a rapid rise in the underlying, obviously, you’d underperform. After one year, the fund may have gone up 25% and you only made 15%. The client may very well say, ‘I wish I bought XOP directly.’ You then have to explain that they bought insurance.”

The underlying fund is listed on the NYSE Arca under the symbol “XOP.”

“Before you sell a note to clients, you always have to go over the different scenarios with them. In some cases, they make money, and in other cases, they run the risk of losing money or to underperform.”

The right ETF

The notes are designed for investors willing to make a bullish bet on oil via an equity index.

“If I wanted to add exposure to the asset class, this product would make sense. Oil has significantly dropped in price. Most forecasters say that oil has sold off. That bodes well for this trade,” he said.

But Balcom said he would not seek exposure to the SPDR S&P Oil & Gas Exploration & Production ETF, which is used in the structure.

“I wouldn’t enter this trade because we already have exposure to XLE,” he said.

The “XLE” ticker designates the Energy Select Sector SPDR ETF.

The Energy Select SPDR ETF holds all the energy components of the S&P 500 index. As a result, it comprises very large-cap oil company stocks, such as Exxon Mobil Corp., Chevron Corp. and Schlumberger NV.

“The XOP is more volatile. It has a lot more small caps than the XLE,” he said.

The XOP fund includes small-sized companies. Its top three holdings are Sanchez Energy Corp., Energy XXI Ltd. and PDC Energy Inc. The fund’s implied volatility is 40% versus 22% for the XLE.

Dangerous sector

Donald McCoy, financial adviser at Planners Financial Services, said the notes are not for everyone.

“This is an area that makes me uncomfortable. There is so much volatility wrapped up in this product,” he said.

“You get a 20% barrier, but oil makes me nervous. No one knows if we’ve seen the bottom yet. You could easily drop 50%.

“We’re sitting on a lot of unused capacity production in the oil and gas market right now.

“Even if crude closes to $60 by the end of the year, when it comes to the oil and gas sector, much more so than any other sector I can think of right now, what’s happening next is completely unknown.”

Crude oil contracts closed at the price of $50 a barrel on Tuesday.

“If you’re risk-averse, I don’t know why you would play with this sector. If a significant downside volatility is a concern, the 20% doesn’t represent enough protection,” he said.

“If you’re not risk-averse, if you’re bullish, maybe you want to find another venue. Why not invest directly and eliminate the liquidity issue? That way you can get in and out anytime. And you don’t have to worry about the cap kicking in after the first year.”

Because of the embedded risk, McCoy said he would stay away from the investment.

“In a balanced portfolio, you’re going to have exposure to the sector anyway. I just don’t want the overexposure,” he said.

“This note represents too much risk for my taste. If I’m already in oil, I’m willing to be patient and wait because I’m already in the market. But I would have a hard time committing new money to it.”

Barclays is the agent.

The notes were scheduled to price Wednesday and settle Monday.

The Cusip number is 06741URY2.

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