From: Ens, Amanda
Sent: Wednesday, December 28, 2016 4:39 PM
To: Jeffrey E.; Richard Kahn
Subject: Energy
We continue to like owning upside in the E&Ps. We think Saudi and other Gulf Cooperation Council members will likely
reduce crude output as stated, while Russia and others are likely to either freeze it or reduce it only modestly. We also
project EM demand growth next year of 1.2mn b/d led by China and India, and see a modest demand contraction in
OECD economies. On these assumptions, Brent should average $61/bbl in 2017 and hit $70/bbl at the peak of the US
driving season.
We've discussed Hess in the past which is still a high conviction pick but it's already moved a lot in relation to the sector.
XOP — the Oil & Gas E&P ETF — is an easy way to express the view with more diversification. Flat call skew (20th
percentile historically) makes the "appearing" call spread, similar to what we traded for financials, look attractive.
* Buy a 6 month XOP 110% call with a short 117.5% call that knock in if XOP trades above 125% during the life of
the trade for 2.45% premium cost
o Gross max payoff if knock-in is triggered: 3.1x (7.5%/2.45%)
o Gross max payoff if knock-in is not triggered: 6.1x (14.9%/2.45%) — you have upside up to 124.9%
Regards,
Amanda
Amanda Ens
Director Global Equities
Bank of America Merrill Lynch
Merrill Lynch, Pierce, Fenner & Smith Incorporated
One Bryant Park I 5th Floor I New York, NY 10036
Phone: Mobile
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