Barclays’ $4.93 million autocallables on Exxon Mobil present risks due to stretched valuation

By Emma Trincal

New York, Dec. 3 – Barclays Bank plc’s $4.93 million of contingent income autocallable securities due Dec. 2, 2024 linked to Exxon Mobil Corp. stock lack sufficient protection for a volatile underlying stock in a volatile sector, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

The notes will pay a contingent quarterly coupon at an annual rate of 11.4% if the underlying stock closes at or above its 80% coupon threshold on the relevant observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the underlying stock closes at or above its initial price on any of the quarterly determination dates, the securities will be redeemed at par plus the contingent payment.

If the underlying stock finishes at or above the 80% downside threshold level, the payout at maturity will be par plus the contingent quarterly payment.

Otherwise, investors will be fully exposed to any losses.

Flying stock

For Kaplan, the share price of the giant oil company is overvalued.

On March 23, 2020, Exxon hit a $30.11 low (non-adjusted for dividend) amid the Covid-induced sell-off. The stock retested the low at the end of October at $31.11. The price has approximately doubled from those dips, closing on Friday at $60.89.

“This is a huge price increase that’s not justified by earnings or by oil prices,” he said.

“There’s definitely the risk of seeing the stock falling lower than the barrier based on its recent performance. A 20% barrier is just not enough.”

Call, coupon risks

On the trading date, the initial underlying price was $61.25, setting the barrier level at $49 a share.

“Go back no further than the early part of 2021, in January and February and you’ll see prices that are below the barrier level,” he said.

“Many people believe they don’t have to worry about valuations because they expect the notes to be called. But you won’t get called if the price drops. Depending on how much it drops, the stock may take a long time to recover and so you don’t get these payments because the coupon payments don’t cumulate.”

“You may get one of two payments overall. That’s another risk.”

Opportunity cost

Noteholders do not get paid dividends. With Exxon, a high-yielding stock, the opportunity cost is unfavorable for investors, he said.

The current dividend yield is 5.89%.

“But the yield was much higher when the stock price was lower,” he said.

If the share price declines, the dividend yield will rise, which would make the “loss of dividends” for noteholders even more of an issue, he added.

The dividend yield is the dividend amount paid to the shareholders divided by the stock price.

“You’re taking different kinds of risks. You also have a certain degree of illiquidity that you wouldn’t have with the actual shares,” he said.

“When you own the stock, you have the flexibility to sell whenever it’s high. That’s not the case here.”

Resilient performance

A common way to track the sector is through the Energy Select Sector SPDR fund, which trades under the ticker “XLE.”

But Kaplan prefers to track energy stocks via the SPDR S&P Oil & Gas Equipment and Services ETF, listed under the ticker “XES.” This lesser-known fund is more volatile as it consists of small and mid-cap components compared to the Energy Select SPDR, which is a large market-capitalization fund, he said.

“Exxon has been very resilient. During the March 2020 sell-off, it was not down nearly as much as XES,” he said.

Part of the performance gap is due to the more volatile nature of the ETF. But not entirely, according to the portfolio manager.

Too much love

“The fact that Exxon has held up so well suggests it’s a dangerously overvalued stock,” he said.

“Energy earnings are growing similarity whether you look at XES or Exxon. The fact that Exxon moved up so much and much more than XES while oil prices are not rallying is due to the popularity of the name. The fundamentals don’t justify the price action. It’s somewhat of a crowded trade.”

Part of the popularity of the stock is due to what Kaplan called a recent “dirty” energy trend.

“While green energy shares did much better than oil stocks last year, we saw a reversal in 2021 with traditional energy stocks like Exxon outperforming the renewable energy sector,” he said.

Big cap inflows

Another bullish driver behind the soaring stock price of Exxon is the overall rally in large-cap stocks.

“Exxon, as an S&P component, has benefited from record inflows into large-cap stocks. This year saw the biggest inflows into large-cap stocks in 20 years.

“It’s not a good bargain,” he said.

“Energy is one of the most volatile sectors in the market. You have many uncertainties. The fact that Exxon is outperforming the sector is not a good sign. The stock is due to a big drop.”

Better be long

If you like the exposure, you’re probably better off owning the shares directly. You’ll have greater flexibility to sell.”

Kaplan saw in the notes “a lot of negatives.”

“The timing is not good; the interest payments are not cumulative so you could end up not getting paid for a while.

“This is a very volatile stock. Exxon has been through huge swings in the past four to five years.

“It deserves a much more generous barrier.”

“I wouldn’t be very interested,” he said.

Barclays is the agent with Morgan Stanley Wealth Management as selected dealer.

The notes settled on Wednesday.

The Cusip number is 06747Y324.

The fee is 2.5%.

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