Citi’s $9.21 million autocalls on energy ETF make for hard-to-predict bet in volatile industry

By Emma Trincal

New York, Jan. 10 – Citigroup Global Markets Holdings Inc.’s $9.21 million of autocallable contingent coupon equity-linked securities due Jan. 6, 2025 linked to the Energy Select Sector SPDR fund offer an income-oriented investment in a volatile sector, which makes the bet risky especially after the sector’s outperformance last year, advisers said.

The notes will pay a contingent quarterly coupon at an annualized rate of 11.1% if the ETF closes at or above the coupon barrier price, 80% of the initial price, on the valuation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par plus the contingent coupon if the ETF closes at or above the initial share price on any quarterly valuation date.

The payout at maturity will be par plus the final coupon unless the ETF finishes below its 80% final barrier level, in which case investors will lose 1% for each 1% decline from the initial level.

No sector play

“I wouldn’t do it. It has nothing to do with the note or the terms of the notes. I just don’t do sector investing. I’ve been burned too many times,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“As a financial planner, I can’t take sector risk. If I was a broker, it may be different.”

In addition, Kunhardt said he was “bearish” on the energy sector.

“This administration has pushed a clean energy agenda and restricted drilling. They’ve made it difficult for oil companies to invest. Three years of this note in this context doesn’t seem appealing to me,” he said.

In addition to that, the three-year tenor could add some volatility.

“The notes will mature just after the 2024 Elections. It’s never a good idea to invest just before or just after a Presidential Election.”

The ETF tracks traditional energy companies through the oil majors. The top two holdings, Exxon Mobil Corp. and Chevron Corp., represents 44% of the fund.

Shortage issue

Another financial adviser said he would not buy the notes but for different reasons.

“I wouldn’t put too much weight into politics no matter who is the president,” he said.

Limited supply in his view was a key contributing factor to the oil rally, which helped the industry, he added.

“When you limit extraction, you create a shortage,” he said.

“Government actions can have unintended consequences. In this case, shutting down oil and gas leases ended up benefiting oil companies.”

Back up from bottom

But a lot of the rally also derived from a remarkable rebound after “multi-decade” lows, he said.

“A lot of things went up last year. Some sectors like energy went up the most because they were severely crushed in 2020,” he said.

In 2020, energy was the worst-performing sector of the S&P 500 index due to the Covid-19 pandemic. The ETF lost approximately a third of its value.

Last year, the Energy Select Sector SPDR ETF returned 54% versus 26.9% for the S&P 500 index as demand for oil rose, pushing up oil prices. Energy was the top-performing sector in the U.S. equity market in 2021.

For this adviser, the downside protection of the notes was not sufficient.

“Energy is the most volatile sector of the S&P. If you only get a 20% barrier, that’s barely enough. If you were to revisit the low of March 2020, you would need three times that barrier size,” he said.

Too much volatility

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, pointed to the volatility of the underlying as well.

“Being down 20% in the energy sector is a normal blip in the last few years,” he said.

“The fund could go down more for a while, and you’ll be missing your payment. Or it may bounce back so much, you’re missing out on the upside when the notes mature.”

The risk of underperforming the underlying fund was even greater in the current interest rates environment.

“Overall, commodities have been out of favor for a good 20 years.

“Rates are rising, which is a positive for energy stocks and value in general.

“There are so many factors behind energy price moves. But whether it goes up a lot or down a lot, price moves can be extreme. Volatility is always there.

“I can’t see the benefit of taking the downside risk with an 80% barrier while capping my upside with such a volatile asset,” he said.

Capex contraction

Josh Young, founder and chief investment officer at Bison Interests, a Dallas-based asset management company specializing in the oil and gas industry, did not directly comment on the notes but said that his outlook was relatively bullish on the ETF.

“The sector was coming out of a bear cycle in 2014 when the Covid bear market hit in 2020. This double downtrend depleted assets and caused oil producers to cut their investments,” he said.

“But demand for oil is rising and companies are not reinvesting their earnings back into the sector. Ironically, fossil fuels are so unpopular that the big oil companies are reinvesting their profits in renewable instead. This has exacerbated the upward pressure on oil prices driving the oil stocks rally.”

The investment manager is optimistic about the sector.

“While it’s impossible to predict the future, I see oil a lot higher. The uptrend for oil stocks should continue,” he said.

But two issues may modify his outlook – the push for green energy and the economy.

“Even though you have good fundamentals in the oil and gas industry, you could envision a negative scenario in which those stocks remain unpopular, and people don’t buy them even if they make good money. That’s one caveat,” he said.

“The second is if we have an economic downturn. But over a three-year period, demand should stabilize.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Wednesday.

The Cusip number is 17329UTF8.

The fee is 2%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.