Energy bonds, convertibles lower as oil declines; Chesapeake exchange continues to take toll

By Paul Deckelman

New York, Dec. 7 – Amid an overall softer tone in the broader junk bond market, distressed bonds were seen lower on Monday.

Traders said that in particular, it was another tough day for the energy sphere.

Crude oil prices hit their lowest levels since 2009, which put oil and natural gas credits such as Energy XXI Ltd., Comstock Resources Inc. and Oasis Petroleum Inc. under pressure in active dealings.

Chesapeake Energy Corp.’s bonds were also lower, with the company’s recently announced exchange offer for its notes as well as oil prices weighing on its issues.

In the convertibles market also, Chesapeake’s paper dropped sharply, in line with a big fall in the value of the company’s underlying shares.

Whiting Petroleum Corp.’s convertibles also traded off.

Back among the bonds but away from oil names, coal names such as Peabody Energy Corp. and Consol Energy Inc. were also lower.

Energy names on the slide

Traders said that the main story of the day was the continued carnage in the energy arena, which was driven by a large fall in crude oil prices Monday that left those prices at their lowest levels since early in 2009.

Reacting to the failure of OPEC ministers to agree to make any cuts in the global oil cartel’s aggregate output when they met last week – meaning the current world oil glut will continue – benchmark West Texas Intermediate crude for January delivery fell $2.32, or 5.80%, to settle at $37.65 a barrel on the New York Mercantile Exchange.

Among the oil and natural gas exploration and production credits getting pounded down in response was Energy XXI’s 11% notes due 2020, which lost more than 3¼ points to end below 39½ bid, on volume of more than $14 million.

Oasis Petroleum’s 6 7/8% notes due 2022 dropped 5¼ points on the session to end at 79¼ bid, with over $13 million having traded, while Comstock Resources’ 10% notes due 2020 were down nearly 3 points, going home at 52¾ bid, with over $12 million having traded.

Coal in a hole

A market source saw various coal names lower in active trading.

He said that Peabody Energy’s 6% notes due 2018 ended down 1½ points at 21 bid, with more than $19 million traded, tops in Junkbondland on Monday.

And he saw Consol Energy’s 5 7/8% notes due 2022 about ½ point lower at 67 bid, on over $16 million of volume.

Chesapeake carnage continues

Another energy name under pressure was Chesapeake Energy. Not only did its bonds fall along with those of its sector peers on the disappointing OPEC news and the resulting sharp drop in oil prices, but the Oklahoma City-based oiler’s paper had already been battered around last week on its announcement of plans to take out some of its existing debt by issuing new second-lien notes at a discount to the existing notes’ prices.

Its 7¼% notes due 2018 lost another 3 points Monday, ending at 54¾ bid, on over $12 million traded.

Although the company’s 2017 and 2018 bonds got hammered down last week, a trader said that the company’s longer-dated issues – which are less likely to be accepted by the company under the terms of the exchange offer it announced last week – “are down a couple of points.”

He saw its 5¾% notes due 2023 at 31¼ bid on Monday, down from 34¾ on Friday.

Chesapeake convertibles fall

In the convertibles market, Chesapeake’s 2.5% notes, which have a 1.5 year put/call, fell to about 55 on Monday from 61 to 62 on Friday. The six-point to seven-point drop was on top of a five-point drop from Thursday.

Chesapeake shares fell another 28 cents, or 6%, to $4.27, which was on top of a 6.6% drop on Friday.

The Chesapeake 2.25% convertibles, which are longer-dated, fell to about 40 from 42. And the Chesapeake convertible preferreds were seen at around 20.

The exchange offer – for which investors have until Dec. 15 to tender – is another step the company is taking to stay afloat as oil, energy and other commodity prices remain depressed and promise to continue to remain depressed for longer given the current outlook for energy as OPEC and other producers are oversupplying the market as they jockey for market share.

But one New York-based trader predicted on Monday that crude oil prices, which on Monday plunged to their lowest levels since Feb. 18, 2009, would continue to drop to about $25 per barrel and “then will rip back up, hard and fast.”

The Chesapeake convertibles have been a focus of traders since the company said last week it is issuing $1.5 billion of newly issued 8% senior secured second-lien notes due 2022 for its outstanding senior notes from its 10 series with maturities ranging from 2017 to 2023.

Hedge funds are looking at the whole capital structure to see where things stand. Few people want the second-lien straight debt, and they are trying to figure out how to get people to roll their debt out for the longer-dated, more secure paper, a trader said.

Also among energy names, Whiting Petroleum Corp.’s convertibles traded down to about 77.5 from 83 on Friday, and SunEdison Inc.’s convertibles were trading unchanged to a little better given where shares were.

But overall paper was offered but not trading, he said.

Rebecca Melvin contributed to this review

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