Morning Commentary: Energy sector drags, but convertibles mostly quiet; Chesapeake eyed

By Rebecca Melvin

New York, Dec. 7 – U.S. convertibles were getting off to a slow start on Monday as equities traded down, led by losses in the energy sector as oil prices fell to near lows for the year.

Chesapeake Energy Corp. was in focus again after a sharp drop in the convertibles on Friday. But even though the Oklahoma City-based energy company’s common shares were down sharply on Monday, the convertible bonds had yet to trade, a New York-based trader said.

Chesapeake’s 2.5% convertibles, which have a 1.5 year put/call, fell about 5 points on Friday to 61 to 62. But they were not seen yet in trade on Monday. Chesapeake shares were down another 8% at $4.20 in the early going.

A prolonged slump in the energy sector continued as oversupply and lower consumption hurts pricing. West Texas intermediate crude oil for January delivery was down $1.86, or nearly 5%, to $38.11 a barrel on the New York Mercantile Exchange, which was near lows notched this year.

For their part, convertibles players are leery about the next shoe to drop. The economics of the energy, renewable energy and commodities sectors are not working well, and the potential for defaults in the coming months is high. Nevertheless, one trader predicted on Monday that crude oil prices would continue to drop to about $25.00 per barrel, but “then will rip back up hard and fast.”

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