Convertibles firmer on thin volume ahead of Christmas; energy improves; equities positive

By Rebecca Melvin

New York, Dec. 23 – U.S. convertibles were firmer on thin volume on Wednesday as a 4% gain in crude oil prices supported equities, a New York-based trader said.

Energy convertibles have been butchered in the past month along with their underlying shares as oversupply fears depressed oil and other energy prices.

Cobalt International Energy Inc., which has been a focus of selling in the last couple of sessions, saw its 2.625% convertibles due 2019 trade up to 58.5 on Wednesday from 57 on Tuesday.

Shares of the Houston-based oil and gas exploration and production company were up 34 cents, or 6%, at $5.80.

Whiting Petroleum Corp.’s 1.75% convertibles were indicated up at 69.69 from 66.27, according to a market source. Whiting shares surged $1.65, or 18%, to $10.65.

West Texas Intermediate crude oil for February delivery gained $1.36, or 4%, to $37.50 on the New York Mercantile Exchange on Wednesday, boosted by government data that showed an unexpectedly large decline in U.S. stockpiles. The U.S. Energy Information Administration said inventories fell by 5.9 million barrels last week, which was better than many estimates that predicted an increase in stockpiles.

Chesapeake Energy Corp.’s 2.5% convertibles due 2037, which have a call in May 2017, traded on Wednesday at 42.5, which was up 0.25 point from Tuesday, but still down by more than half from 86.5 on Nov. 9, according to Trace data.

Shares of the Oklahoma City-based oil and natural gas company gained 42 cents, or 11%, to $4.40 even though natural gas for January delivery traded close to a 16-year low for the week ended Dec. 18.

U.S. natural gas futures for January delivery were last at $1.984 per MMBTU as of 3:15 p.m. ET, which was up from $1.888 per MMBTU previously and up from $1.70 per MMBTU on Friday, according to the derivatives marketplace CME Group.

But the convertibles market in general was functioning at less than half throttle as the ranks of market participants thinned ahead of Christmas.

Financial markets will close early on Christmas Eve on Thursday and will remain shut on Friday for Christmas Day. Markets will reopen on Monday for another holiday-shortened week.

“It’s as quiet as you would expect on the day before Christmas Eve,” a New York-based trader said early Wednesday.

There were only odd lots trading, or trades of $1 million to $2 million in size, he said.

Equities well positioned

The outlook for convertibles in 2016 is for generally muted returns as U.S. equities are expected to hold the market back. Equities are expected to play a key role in driving U.S. convertible return at this point in the cycle, Barclays convertibles research team said in its 2016 outlook report: Driving in the Right Lane.

The Barclays analysts said that according to U.S. convertibles’ valuation metrics, convert underlying equities are significantly cheaper than the comparable equity indices.

In addition, convertible underlying equities are more geared to a potential improvement in growth.

On a top line and earnings basis, convertible underlying equities exhibit stronger fundamentals, including “significantly higher sales and EBITDA growth,” Barclays said. The analysts cautioned however that if gross domestic product comes in lower than expected, then convert equities are likely to underperform as well.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Cobalt International Energy Inc. NYSE: CIE

Whiting Petroleum Corp. NYSE: WLL

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