Sliding oil prices pull energy issues lower; other natural-resource names also on the slide

By Paul Deckelman

New York, July 6 – Distressed-debt market participants came back to work on Monday following the Independence Day holiday break to find generally weaker levels all around as the larger junk bond market retreated along with equities.

This was particularly true in the energy arena, which since last fall has been one of the major clusters of activity in the distressed-debt arena.

Oil prices fell sharply, a plunge caused in part by jitters related to the surprisingly vehement Greek referendum rejection of a bailout package with many austerity strings attached to it, as well as worries over China’s sluggish economy and the prospect of an Iran nuclear deal, which could result in America and other western nations lifting sanctions and putting Iranian oil back into the market. All of this hurt the shares and bonds of energy companies.

As a result, energy names such as California Resources Corp., SandRidge Energy, Inc. and Chesapeake Energy Corp. were dragged lower. Rex Energy Corp.’s convertible notes were among the notable losers.

Even Linn Energy LLC’s bonds were off, despite the fact that the oil and gas exploration and production company announced plans for an asset sale and said it had finalized previously announced alliances with investors willing to pump as much as $1.5 billion total into Linn’s energy development efforts.

Commodity price weakness, spurred by economic worries, also pushed the likes of coal operator Peabody Energy Corp. and iron ore miner Fortescue Metals Group Ltd. down.

And Puerto Rico’s bonds were better for a third consecutive session, although on considerably less volume than had been seen last week. The troubled island U.S. commonwealth’s bonds have been recovering from their recent lows ever since last Wednesday’s announcement that its government had made a total of $1.9 billion of scheduled July 1 debt payments, averting a possible default.

A down day in the market

A trader said that Monday’s session “wasn’t too much more active than Thursday’s had been,” noting the usual slowness in getting back to normal after a long holiday weekend.

A second trader called things “real slow,” between the post-holiday returnees straggling back to work, as well as the dampening effects of the weekend events in Greece, where over 61% of the public voted against a European Union bailout plan that would have provided the troubled nation with liquidity – but at a cost of imposing unpopular austerity measures. The “no” vote raises the likelihood that Greece may leave the EU altogether, a source of continued anxiety in the international financial markets.

U.S. stocks fell, with the bellwether Dow Jones Industrial Average ending off by 46.53 points, or 0.26%, at 17,688.58, with other popular indexes also lower.

The Greek vote, as well as concerns about China’s slowing economy and worries that a nuclear power agreement with Iran could lead to an end of sanction and millions of barrels of Iranian oil coming to world markets, knocked oil prices for a loop, with the benchmark West Texas Intermediate crude off by $4.40, or 7.7%, on New York Mercantile Exchange trading, at $52.53 per barrel.

A trader said that all of those factors taken together – Greece, stocks oil, the post-holiday hangover and last week’s big outflows from junk market mutual and exchange-traded funds (AMG Lipper saw a $3 billion cash loss from the funds, while EPFR Global pegged its outflow measure at $3.5 billion) – conspired to keep many junk investors on the sidelines.

“So they kind of sat back and watched the [stock] market,” he said – and where there were junk bonds trading, they were mostly lower.”

“Oil, coal, iron ore, all were weaker.”

Oil names slide

In the energy patch, California Resources’ 6% notes due 2024 were down a deuce on the day at 82 bid, a trader said, with over $24 million traded, making it one of the most active junk bonds of the day.

The Los Angeles-based oil and natural gas exploration and production company’s 5% notes due 2020 slid by 2 5/8 points, to end at 85 bid, with over $16 million traded.

SandRidge Energy’s 8¾% notes due 2020 ended down 2¼ points at 88¾ bid, with over $10 million traded, a market source said. He added that the Oklahoma City-based oiler’s “much junkier” 7½% notes due 2021 fell 1½ points to 43 bid.

Oklahoma City-based Chesapeake Energy’s 5¾% notes due 2023 dropped by 2 points to 89½, with over $13 million changing hands.

Linn Energy’s 7¾% notes due 2021 slid by 1¾ points to 75 bid – even as the Houston-based energy operator announced plans to sell some Permian Basin assets for $281 million, on top of finalizing previously announced deals for Quantum Energy Partners and GSO Capital Partners to fund Linn’s exploration and development operations to the tune of $1 billion and $500 million, respectively.

Rex converts in retreat

In the convertibles market, Rex Energy Corp.’s 6% convertible was indicated down to 43 from nearly 46 at the end of last week.

The underlying Nasdaq-traded shares of the State College, Pa.-based independent oil and gas exploration and production company meantime fell 59 cents, or nearly 12%, to $4.4225, retracing nearly all of their June gains.

Coal, iron ore off

Traders said that other resource-based names were also pulled lower.

Australian iron ore producer Fortescue Metals Group’s 9¾% notes due 2022 nosedived 3¼ points to 99 bid, with over $23 million traded, while its 8¼% notes due 2019 ended at 81¼ bid, down 1 5/8 points, on about the same volume. Its bonds began sliding last week after the Australian government announced lower iron ore prices.

Peabody Energy’s 10% notes due 2022 lost 1¼ point to end at 58¼ bid, with over $17 million traded. The St. Louis-based coal mining company’s bonds have been under pressure since it warned last week that second-quarter adjusted EBITDA and per-share earnings would come in weaker than the company had previously forecast.

Puerto Rico improvement continues

In the municipals market, for a third straight session Puerto Rico’s bonds were seen trading better on Monday; a trader said that its benchmark 8% general obligation bonds due 2035 were “a little better, up another 1 or 2 points.”

He quoted that paper in a 70½-to-71½ bid context.

However, noting the falloff in volume from the more-active trading levels seen last week, he said that Puerto Rico “for now, is last week’s story.”

The bonds had come under pressure earlier last week on investor fears that the troubled tropical paradise might not be able to make scheduled debt payments due on July 1 – especially after its governor announced that Puerto Rico’s estimated $73 billion of public debt was “unpayable” and said he was seeking stretched-out payments.

That warning raised the specter of a possible default on obligations, as Greece did last week on an International Monetary Fund loan – many commentators last week compared the two struggling debtors – or, at best, a Detroit-style Chapter 9 bankruptcy, with the prospects of haircuts for all.

However, investor fears were assuaged by Wednesday’s announcement that the government in San Juan had paid $1.9 billion due on some of its own general obligation bond debt, bank debt and obligations of the Puerto Rico Electric Power Authority, keeping the wolf from the door, at least for now.

Rebecca Melvin contributed to this review.

© 2015 Prospect News.
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