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Upstream Stocks: Why Implied Volatility Is Important

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High implied volatility                   

On January 27, 2017, Cobalt International Energy (CIE) had the highest implied volatility among the upstream stocks that make up the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Cobalt International Energy’s implied volatility was ~101.5%. It was ~22% less than its 15-day average of 130.1%.

High implied volatility in a stock indicates the market’s expectation of large movements in its price. In the next part, we’ll analyze Cobalt International Energy’s price returns.

Let’s take a look at a breakdown of the implied volatilities of other upstream stocks on January 27, 2017:

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  • California Resources (CRC) had an implied volatility of ~76.5%, 6.8% below its 15-day average.
  • Denbury Resources (DNR) had an implied volatility of 66.7%, 6.5% below its 15-day average.
  • Sanchez Energy (SN) had an implied volatility of ~58.2%, ~12.1% below its 15-day average.
  • SM Energy (SM) had an implied volatility of ~53.9%, ~1.8% below its 15-day average.

On January 23, 2017, Sanchez Energy’s implied volatility rose 13.7%. On the same day, the stock fell 1.4%. On January 23, 2017, the company announced that the total estimated production for 2016 was about 53,350 boe (barrels of oil equivalent) per day. The earlier guidance was between 48,000 boe per day and 52,000 boe per day.

Low implied volatility

On January 27, 2017, Occidental Petroleum (OXY) had the lowest implied volatility among upstream stocks that are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) at ~19.4%. It was 9.1% below its 15-day average of ~22.1%.

Let’s look at some other upstream stocks with low implied volatilities on January 27, 2017:

  • EOG Resources (EOG) had an implied volatility of ~21.8%, 4.4% below its 15-day average.
  • ConocoPhillips (COP) had an implied volatility of ~24.5%, 8.4% below its 15-day average.
  • Apache (APA) had an implied volatility of ~25.8%, ~4.2% below its 15-day average.
  • Noble Energy (NBL) had an implied volatility of ~26.2%, 12.5% below its 15-day average.

A pattern emerges when we compare high implied volatility stocks with low implied volatility stocks. Most high volatility stocks are small upstream energy companies with weak financial metrics. Stocks with lower volatilities tend to be large companies in more solid financial situations.

In the next part of this series, we’ll look at the returns of these upstream stocks.

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