Citi’s $1.52 million autocalls linked to Energy ETF show ‘good risk-reward,’ adviser says

By Emma Trincal

New York, March 31 – Citigroup Global Markets Holdings Inc.’s $1.52 million of 0% autocallable barrier securities due March 26, 2026 linked to the Energy Select Sector SPDR Fund offer energy bulls an attractive risk-adjusted return, advisers said.

The notes will be called automatically at par plus a premium of 20% if the closing level of the ETF is greater than or equal to its initial level on March 25, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF gains, the payout will be par plus 155% of the ETF return.

Investors will receive par if the ETF declines but ends at or above its 50% final barrier and will lose 1% for every 1% that the ETF declines if it finishes below the final barrier.

Big oil

Scott Cramer, president of Cramer & Rauchegger, Inc., said the notes offered two positive upside scenarios whether upon the one-time call or at maturity.

“I happen to be bullish on the energy space. I know the XLE very well,” he said referring to the ticker of the Energy Select Sector SPDR Fund.

“These are bellwether oil companies with strong earnings and margins,” he said.

Exxon Mobil Corp. and Chevron Corp. are the two top holdings in the fund with a combined weighting of 43.06%.

Other stocks among the top 10 holdings include Marathon Petroleum Corp., EOG Resources Inc., ConocoPhillips and Schlumberger NV.

“Since 2020 and even before, the balance sheets of those companies have become a lot better. They have a lot less debt. Some of them have offered share buybacks. They’re growing,” he said.

“This note offers a very good risk/reward. It’s probably going to get called, which is fine. You get 20%.

“Everybody is going to be using energy. We’re not running out of demand. Meanwhile supply is going to remain constrained. All the fundamentals line up with this.”

Lower prices

Oil prices peaked last spring in the wake of Russia’s invasion of Ukraine but have declined since to below $80 a barrel. Cramer offered two explanations.

“There has been a global coordinated release of oil reserves from many different countries, not just the U.S. with its Strategic Petroleum Reserve but also from all European countries, Japan and many others,” he said.

“Then you had China’s lockdowns which reduced global demand and pulled prices down.”

The reopening of China should support higher oil prices, he said.

Oil prices are volatile however and could change direction due to a variety of factors.

“Recession for sure is a consideration. It’s definitely a threat to demand. At the same time, the world is growing. People need fuel,” he said.

The push for green and renewable energy has also been a challenge for oil producers. But Cramer said the trend is temporary.

“The vast majority of our energy still comes from fossil fuels. Green energy or sustainable energy is mostly designed to provide electricity. Storing it is a real problem. It’s expensive. The only reason those sustainable energies have done well is because the government has subsidized them,” he said.

Two positive scenarios

For investors with a bullish outlook on energy, either one of the two outcomes of the notes was favorable.

“Getting 1.55 times the gain with no cap is really appealing,” he said.

The most likely scenario however was the call at the end of the first year.

The 20% call premium was automatic paid unless the share price was negative on the call date. As a fixed return, one could consider the premium as a cap.

“You could get capped at 20%, of course. But you also have a 50% barrier. If you want to take all the risk of the ETF, go buy it. If you want to mitigate the risk, buy a structured note,” he said.

The barrier was deep. Yet Cramer would prefer a buffer or even more protection.

“I’d rather have a 100% downside protection if you ask me, but they wouldn’t give it to me. Seriously, this note is very well protected. A 50% barrier is very robust.”

Investors in the note as with any other structured product must give up dividend payments. The underlying ETF has a dividend yield of 4.27%.

“I’m giving up 4% in dividends and I’m getting 20% in one year? Is it worth it? Of course, it is,” he said.

Good deal, tough bet

A financial adviser said the structure was attractive, but he would not use the notes because he usually avoids sector plays.

“It’s a very interesting note. The XLE has gone up hugely,” this adviser said.

From a $65.48 low in mid-July to a high of $94.71 in mid-November, the share price soared by 45%.

The deal priced with the underlying closing at $78.68, or 17% off the November high but still 20% above the low.

“It’s not an ideal entry point. But with oil, you never know which way it goes. The Saudis could be opening the floodgates. It’s a sector that can move much more quickly than the broad indices, which is why I kind of stay out if it,” he said.

But some of the terms of the product were very advantageous to investors, he said.

“The 50% barrier provides a heck of a cushion.”

Since the lows of March 2020, the ETF has nearly tripled in price, he noted.

“There’s been a huge post-pandemic growth. So of course, you have to be defensive.

“But I’m not an expert in this area. There are too many geopolitical or political forces at play.

“Those big oil producers have gone through a roller coaster. Biden doesn’t like those companies. It’s a very volatile, very unpredictable industry,” he said.

Considering the notes would first require extra due diligence, he said.

“That said, it’s a great note.

“Not just because of the barrier. You also have this 1.55 leverage at maturity with no cap or a possible 20% return in one year. These terms are really neat.

“I like the note. I’m just not comfortable with the sector,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes settled on March 27.

The Cusip number is 17331HDY9.

The fee is 0.75%.

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