Nexen Call Volume Hit 4-Year High Before $15.1 Billion Deal
Trading in bullish Nexen Inc. (NXY) options reached the highest level since 2008 before Cnooc Ltd. (883) announced it would buy the energy company, including three trades that may bring profits of more than $40 million.
A total of 47,302 calls traded on the Calgary-based company’s U.S. shares last week, with bullish contracts reaching 24,554 on July 20, the most since March 2008, data compiled by Bloomberg show. New York Stock Exchange-listed shares of Nexen surged 52 percent to $25.90 today.
Call options that convey the right to acquire shares for a given price by a certain date usually offer higher returns than stock to traders speculating on takeover. Nexen said last year it was exploring a sale and the departure of its chief executive officer in January spurred speculation it might find a buyer.
“We often see these kind of things happen in deals,” John Buckingham, chief investment officer at Aliso Viejo, California- based Al Frank Asset Management Inc., where he oversees $500 million including Nexen shares, said in a phone interview. “It doesn’t surprise me when you hear deals announced that there is often something suspicious going on in the options market.”
Cnooc, China’s largest offshore oil and gas explorer, said today that it agreed to pay $15.1 billion in cash to acquire Nexen in the biggest overseas takeover by a Chinese company. The price is $27.50 for each common share, a premium of 61 percent to Nexen’s closing price on July 20, according to its statement to the Hong Kong stock exchange today.
An investor bought 23,000 December $19 calls and sold 11,500 December $16 puts on July 20, according to Joe Kunkle, founder of OptionsHawk.com, a Boston-based provider of options market data and analytics. The strategy profits if the shares exceed the higher strike price by expiration and would make a profit of almost $19 million at the $27.50 offer price.
The same strategy was used to buy more than 20,000 September $17 calls while selling September $16 puts on July 16 and July 17 for a potential profit of almost $22 million, Kunkle said.
“The timing, size, and structure of these trades make it appear that this deal was leaked,” Kunkle wrote in an e-mail today.
While a slumping stock price led Nexen to consider options such as a sale last year, the company decided it wouldn’t get a high enough premium and instead should focus on fixing problems at its Long Lake oil-sands facility, CEO Marvin Romanow said at the company’s investor day on Dec. 1.
“We looked at selling the company,” Romanow said at the time. “We looked at selling major assets. We looked at setting up separate companies. We looked at every financial re- engineering that was done in our industry and in other industries to see if there was a way to generate some value for you sooner.”
The stock rose the most in three months on Jan. 10 with the announcement that Romanow was exiting. Once worth as much as C$22.8 billion ($22.4 billion), Nexen declined 20 percent during Romanow’s three-year tenure.
Call volume on Nexen Canadian options rose to a record 16,682 on July 20, data compiled by Bloomberg show. That was 39 times more than the average for the previous 20 trading days. A total of 20 puts changed hands that day, the data show.
“It looks suspicious,” said Frederic Ruffy, a senior options strategist at WhatsTrading.com, who estimates the investors made a profit of about $30 million on last week’s trades. “The heavy volume in Nexen options last week was very well timed.”