JPMorgan, UBS link to energy sector; moderately bullish products target bargain hunters, adviser says

By Kenneth Lim

Boston, March 10 - Issuers continue to push out products linked to the energy sector Tuesday, as investors see the opportunities in a highly volatile sector, an investment adviser said.

JPMorgan Chase & Co. plans to price zero-coupon buffered return enhanced notes due March 31, 2010 linked to a basket of seven energy stocks.

The basket comprises equal weights of the common stocks of XTO Energy Inc., Noble Energy Inc., Chesapeake Energy Corp., El Paso Corp., Newfield Exploration Co., Pioneer Natural Resources Co. and Encore Acquisition Co.

At maturity, the notes will pay par plus double any gain in the basket, subject to a maximum total payout of 136% to 144% of the principal. The exact cap will be set at pricing. The payout will be par if the basket finishes flat or declines by no more than 10%. Investors will lose 1.1111% of the principal for every 1% that the basket declines by more than 10%.

UBS AG launched yield optimization notes due March 25, 2011 linked to the common stock of the Oil Service Holdrs Trust exchange-traded fund.

The notes will pay a monthly coupon at an annualized rate of 12% to 14.25%. The coupon will be set at pricing.

At maturity, investors will receive par if the underlying fund does not finish below 70% of the initial price. Otherwise investors will receive the cash equivalent of one fund unit for each note held. The notes will be sold at the initial stock price of the fund.

Economic proxy

Oil prices have taken a beating in recent months because of waning demand as the U.S. economy struggles, the adviser said.

"I think what you've seen since the fourth quarter is the price of oil has been sort of a proxy for the U.S. economy," the adviser said. "We saw oil prices fall just as the U.S. economy really plunged into its current crisis. That falloff in demand has been so strong attempts by OPEC to cut down on the supply haven't worked very well. When the U.S. economy picks up again, you'd expect oil prices to climb back up. It's a function of demand, so there's probably going to be a bit of a lag, but on the whole I think there's a good case to be made for a correlation there."

The increased volatility in oil prices has created opportunities in the sector, the adviser said.

"I think there are segments of the market that are definitely interested," the adviser said. "The highs of last summer are still fresh in the minds of many people. If you think oil prices should be higher, you would think energy stocks are a real bargain right now."

Cautious products

The products that were launched Tuesday reflect a slightly cautious approach to the sector, the adviser said.

"It's a two-year income product that tries to give you a bit of coupon as long as the underlying doesn't fall by more than a certain amount," the adviser said of the UBS notes. "You're not really looking at the trust going up by a lot - if it's up by more than 12% to 14.25% you'd prefer to be holding the underlying directly - but you don't think it's going to be lower than 70% of what it is now."

As for the JPMorgan notes, the enhanced participation on the upside could also work well in a recovering sector, the adviser said.

"Normally when markets recover they tend to do so slowly, so enhanced participation helps an investor to position for a turnaround," the adviser said. "This is a little more optimistic than the UBS one. It's a 10% buffer versus 30%. But the upside is potentially higher (no cap)."

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