GM gains in active trade; DryShips adds 'a few pennies' dollar neutral; oil names trade

By Rebecca Melvin

New York, Jan. 4 - General Motors Co.'s convertible mandatory preferreds gained in active trade Tuesday when the Detroit-based automaker released its vehicle sales reports, showing strong gains for December and full-year 2010, and forecast industry-wide sales in the United States will move up another 10% in 2011.

DryShips Inc.'s convertibles moved higher in active trade along with their underlying shares - but gaining just a smidge on a dollar-neutral basis - on contract news.

There were also some other oil-related names in trade, including SM Energy Co. and Superior Energy Services Inc., and those prices were mixed to higher as crude oil prices were actually lower, but still close to two-year highs.

Coal names were heard in trade again as speculation over supply continues in the face of the flooding situation in coal-producing Australia that has disrupted shipments.

Many commodity-related, oil-related names are said to be in focus for the coming year.

Bank of America Merrill Lynch convertibles analysts recommended being overweight convertibles linked to energy, gold and coal for 2011, with their favorite names including Apache Corp., Pioneer Natural Resources Co., and Alpha Natural Resources Inc.

DryShips is also on Bank of America's recommended list, skewed to "risk on," on expectations that lower-quality credits are likely to outperform in 2011 as liquidity should support continued refinancing, the analysts said in their Dec. 20 outlook report.

Recommendations weighed

But after two days of trading in the new year, there were no trends yet spotted, however, sources said. Convertibles players were said to be "settling in" and combing their portfolios to add more to favorite holdings, rather than embarking yet on any significant rotation, especially given the market's currently frothy valuations.

"Valuations are fairly stretched. Things could certainly go higher, but at this point you are betting more on technicals than you are on valuation," a New York-based sellside trader said.

Another source said that the market is firm in terms of valuation and there is no broad-based macro rotation or selling pressure.

"The market is relatively firm in terms of valuations; people are looking to add on to positions at the start of the year, rather than anything else," a New York-based analyst said, adding that it was difficult at this point to "pinpoint a theme."

Volume picked up on Tuesday from Monday, but there was still no new issuance activity, and sources said that they thought issuance would still be tilted toward the straight debt market for the time being.

"Rates are higher than they have been but still pretty low," a sellsider said.

As for the secondary market, the sellsider said, "it's hard to pinpoint a theme. People are picking and choosing; running through their books and picking out relative-value trades."

In U.S. economic data on Tuesday, the Commerce Department reported that U.S. factory-goods orders unexpectedly rose 0.7% in November. Economists had forecast a 0.1% decline.

GM revs up

GM's 4.75% convertible mandatory preferreds traded at $54.60 versus a common stock price of $37.35 during the session, according to a New York-based sellside desk analyst. And at the end of the session, the preferreds were higher at $55.27, up 87 cents, or 1.6%.

GM shares popped early in the session, then pulled back, and finally rallied again, stimulating trade in that name.

"We traded a bunch of that today," a New York-based sellside analyst said. "The numbers were pretty strong."

The numbers he was referring to were the car and light truck sales figures and forecasts. GM sales were up 6.8% year over year, and the company predicts industry-wide sales will rise another 10% this year.

Nearly all major car makers reported higher December sales from a year ago on Tuesday. But the convertibles of Ford Motor Co. were mostly quiet given that the Dearborn, Mich.-based carmaker's convertibles issues are much smaller than they used to be due to recent buybacks.

GM's December sales totaled 224,147 cars and light trucks, up 8% from a year ago. Ford reported sales of 190,191 light vehicles, up 6.8%. While Chrysler sold 100,702 vehicles in December, up from 86,523 a year ago and rising from the 74,152 it sold in November.

For the full year, GM sold 2.2 million cars and trucks, up 6.8% from a year ago. Ford sold 1.9 million, up 19.5% from 2009. Chrysler's full-year sales were 1.1 million vehicles, up 17%.

Ford's figures are adjusted to take into account the sale of Volvo, the Swedish car maker, which was acquired by a Chinese auto maker in 2010. Without the adjustment, Ford's December sales grew 3.5%.

DryShips adds slightly

DryShips' 5% convertibles due 2014 traded at 101 versus a share price of $5.30, according to a New York-based sellside trader, which was up outright from about 100.5 previously and higher on a dollar-neutral basis by "a few pennies," a sellsider said.

Price action around midsession was around 101 bid, 102 offered, but the convertibles had been even higher around 103 and 104 with the stock higher, a sellside source said.

The Athens-based shipping and oil rig company announced lease deals with Cairn Energy plc and Petrobras Tanzania worth $590 million.

The company has signed six-month leases with Cairn for the Leiv Eiriksson rig at $95 million and the Ocean Rig Corcovado for $142 million.

DryShips also signed a 60-day drilling contract for its Ocean Rig Poseidon worth $353 million with Petrobras Tanzania, which will result in the Leiv Eiriksson rig being released early.

Bank of America Merrill Lynch convertibles analysts said in their Dec. 20 outlook report that "Deep water rig operators were hit hard by the Gulf of Mexico spill but higher oil prices could be a tailwind in 2011."

"DryShips recently issued common shares and landed a secured loan facility to address the funding issues related to its drillship construction. The 5% DryShips convert it valued cheap and presents an attractive alternative to the underlying [common stock]," the analysts said.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Apache Corp. NYSE: APA

DryShips Inc. Nasdaq: DRYS

General Motors Co. NYSE: GM

Pioneer Natural Resources Co. NYSE: PXD

SM Energy Co. NYSE: SM

Superior Energy Services Inc. NYSE: SPN

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