Traders work in the energy options pit at the New York Mercantile Exchange (file). Analysts are slashing projections for both oil prices and oil companies’ profits.
Companies including Exxon Mobil Corp, Chevron Corp and ConocoPhillips are down more than 9% from their highs this year.
Bloomberg/London
Traders are speculating the slump in oil companies will get worse.
Even after valuations for an index tracking the shares slumped 40%, investors are loading up on bearish options. The cost of puts on the SPDR S&P Oil & Gas Exploration & Production ETF jumped to the highest level in seven years versus calls. The exchange-traded fund tracks companies including Exxon Mobil Corp, Chevron Corp and ConocoPhillips, which are down more than 9% from their highs this year.
Oil companies were among those losing the most during the stock selloff, with the commodity entering a bear market as global demand growth slowed and threats to supply in Iraq and Libya receded.
While oil rebounded from this month’s low, investors are hedging against further declines, according to Serge Berger of Blue Oak Advisors.
“Longer term, I’m definitely bearish on oil,” said Berger, a Zurich-based trader, who also runs the research website The Steady Trader. “The issue here isn’t so much ‘Is it cheap or not?’ Given the amount of volatility we have in the market, cheap can become cheaper. Oil will become less and less of a precious commodity.”
Companies in the index that the oil ETF tracks trade at 26.6 times reported earnings, data compiled by Bloomberg show. Multiples fell as much as 39% from June to a one-year low on October 14. The benchmark Standard & Poor’s 500 Index has a valuation of 17.6 times. The ETF lost 1.9% to $58.92 a share at 10.06am in New York yesterday.
Both volume and the number of options outstanding on the oil ETF surged this month, and nine out of the 10 most-owned contracts are bearish. Those hedging against a 10% decline in the fund cost 10.7 points more than calls betting on a 10% gain on Tuesday, according to three-month implied- volatility data compiled by Bloomberg. That’s the widest spread since September 2007.
Analysts are slashing projections for both oil prices and oil companies’ profits. While they estimate earnings at companies tracked by the ETF will jump 32% in 2014, those projections have dropped by 9.7% this month. That’s not enough to account for the decline in oil, and crude could fall even further, according to Blue Oak Advisors’ Berger.
Goldman Sachs Group cut its oil-price estimate this week, and Barclays lowered it for the second time this month.
To Wells Fargo & Co strategist Gina Martin Adams, the plunge in energy companies has “gone too far too fast,” she wrote in an October 21 report. The stocks have declined more than oil prices would signal and should perform better than the broader market in the near term, Morgan Stanley’s Adam Parker said in an October 20 note.
Investors have sold oil and gas shares indiscriminately and the decline has left some companies at attractive valuations, according to Ted Harper of Frost Investment Advisors.
“It was certainly the baby getting thrown out with the bathwater,” said Harper, who helps manage more than $10bn from Houston. “When you have higher quality, consistent growers getting marked down to the extent that they’ve been, that creates opportunities.”
Traders are betting on more price swings. The Chicago Board Options Exchange/NYMEX WTI Volatility Index has jumped 35% this month, the most since May 2012. The gauge measuring expected price swings is near a one-year high relative to the CBOE Volatility Index, or VIX, of S&P 500 companies.
After falling 25% from June to $80.52 a barrel on October 22, West Texas Intermediate closed at $82.20 on Wednesday.
“The sector is widely held by hedge funds who got hurt with the move lower in oil prices,” said Adam Perlaky, chief strategist at New York-based broker New Albion Partners LLC. “The concern at this point is a break below $80 a barrel in oil. If the levels hold, the sector should rally, but people are protecting against another leg lower.”
