Thursday, August 30, 2012

Venoco (VQ) - Equity and Option Markets Agree; Deal Isn't Done; Vol Diff Opens

VQ is trading $11.11, up 1.1% with IV30™ up 2.0%. The LIVEVOL® Pro Summary is below.


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Venoco, Inc. is an independent energy company primarily engaged in the acquisition, exploration, exploitation and development of oil and natural gas properties.

This is a vol and stock note on a firm that has news of its CEO taking the company private. Let's start with some news and then get to the vol. News:


What: Shares of oil and gas explorer Venoco (NYSE: VQ) jumped 17% today when word leaked out that its CEO is lining up financing to buy the company.

So what: CEO Tim Marquez, who owns 50.3% of shares, has offered to buy the remaining share of the company for $12.50 per share, and he may be moving closer to financing the deal. He is in advanced talks about a $436.5 million package that would include debt, asset sales, and capital raises to buy out the company.

Now what: Since shares closed yesterday at $9.53, the market hasn't had a lot of faith that Marquez's offer would wind up in an actual buyout. But rising energy prices may make a deal easier to pull off; if financing comes through a deal may close as early as September.

Source: The Motley Fool via Yahoo! Finance; Why Venoco's Shares Popped, written by Travis Hoium.

On 8-29-2012 S&P cut VQ's credit rating but did remove the rating "from CreditWatch with negative implications and assigned a stable outlook."
Source: S&P via Reuters; TEXT-S&P cuts Venoco's corp credit rating to 'B-'.

Let's turn to the Charts Tab (six months) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side I've highlighted the pop on that takeover news. We can see that until then the stock ride was a bumpy one. The 52 wk range for VQ is [$6.50, $12.00], so that takeover price would be an annual high if it gets realized.

On the vol side we can see how the implied dipped slightly on the news. A vol drop would be normal behavior on a takeover bid, the fact that the vol both didn't drop very much and has risen since reflects the option market's pricing of the likelihood of the event occurring. Or, in English, the option market does not reflect a lot of certainty around this takeover in the near-term, and for that matter, neither does the equity market ($11.11 is not $12.50).

Let's turn to the Skew Tab to examine the line-by-line and month-to-month vols.

The skew has maintained a normal shape, but the vol rises from the back to the front monotonically. In English, the option market reflects elevated risk in the near-term (Sep expo.) relative to the intermediate-term (Oct expo) and long-term (Dec expo).

Finally, let's turn to the Options Tab, for completeness.

Across the top we can see the monthly vols are priced to 110.64%, 81.65% and 62.79% respectively for Sep, Oct and Dec. As a more concrete example of the vol diff, check out the mid-market value for the Sep/Oct 10 put spread. That spread is priced to ~$0.125 in a stock that was trading in the mid 9's a couple of weeks ago. A few minutes before I took that screenshot, the spread's mid-market price was just a dime. The day before the news, that spread was priced to ~$0.85.  This is just another way to examine the difference in risk premia between the front two months -- that is, to use prices rather than vols.

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