Distressed energy bonds, preferreds remain weak despite oil’s gain; Fannie, Freddie paper retreat

By Stephanie N. Rotondo

Seattle, Jan. 14 – The distressed energy sector continued to be under pressure on Thursday, despite a gain in domestic oil prices.

The rebound was attributed to short covering and “natural covering” as options were set to expire at the end of the day.

West Texas Intermediate crude rose 2.03% to $31.10 a barrel.

In the common equity markets, oil’s rise prompted investors to snap up energy stocks, thereby pushing prices higher. Elsewhere in the capital structure, the view wasn’t as rosy.

A trader remarked that “some of these energy guys that had held up pretty well” lost their mojo in Thursday trading. For instance, WPX Energy Inc. saw its 8¼% notes due 2023 dive over 8 points to 65¾.

Oasis Petroleum Inc. was another big loser, the trader said, seeing the 6½% notes due 2021 falling nearly 4 points to 44.

At another desk, a market source deemed MEG Energy Corp.’s 7% notes due 2024 down 5½ points at 59½ bid.

In late December, Warburg Pincus – MEG’s largest shareholder – indicated that it was considering slashing its stake in the oil sands producer, given the turbulent tone of the market.

Meanwhile, SandRidge Energy LLC’s 7½% notes due 2021 were then pegged at 5¼, off over 2 points.

For its part, SandRidge is expected to burn through most – if not all – of its cash in 2016 if oil prices remain below $40.

As for distressed energy preferreds, there was increased activity, though the weak tone remained.

Vanguard Natural Resources LLC’s 7.625% series B cumulative redeemable preferred units (Nasdaq: VNRBP) dropped 72 cents, or 14.09%, to $4.39. Legacy Reserves LP’s 8% series B fixed-to-floating rate cumulative redeemable perpetual preferred units (Nasdaq: LGCYO) were also down, losing 40 cents, or 10.96%, to close at $3.25.

Breitburn Energy Partners LP’s 8.25% series A cumulative redeemable perpetual preferred units (Nasdaq: BBEPP), however, closed up $1.32, or 29.4%, at $5.81.

Fannie, Freddie slump

Fannie Mae and Freddie Mac preferreds sunk in Thursday trading, though a market source noted that the paper outperformed its common equity counterparts.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) dropped 12 cents, or 3.88%, to $2.97 in heavy trading – over 4.2 million shares. Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) weren’t as active – about 1.6 million shares were exchanged – but declined 11 cents, or 3.55%, to $2.99.

Fannie’s variable rate series O noncumulative preferreds (OTCBB: FNMFN) meantime lost 41 cents, or 7.44%, to end at $5.10.

The GSEs preferreds have been on the slide of late, though without any major news to act as catalyst. Late Wednesday, The Wall Street Journal published a snippet on Fannie, noting that the agency’s common equity had dropped considerably as well, falling under $1.50.

The Journal noted that there was no news to push that paper down either, but said that the last time the common was trading so low was October 2014 when a federal judge had just dismissed an investor lawsuit against the government’s conscription of the agencies’ profits.

One preferred stock source remarked that “a lot of times, there is no reason” for the losses mounting in Fannie and Freddie paper. “It’s just more people are ready and willing to throw in the towel on them.”

Still, the source also mentioned that Fannie had recently sought to lower expectations by forecasting weaker single-family mortgage originations – “their bread and butter,” the source said. That news could have certainly hammered the common, the source said, as well as investors enlightened to the fact that the “concept that these guys are cash machines” is just “fantasy.

“The heavy volume [in the preferreds] could be nothing more than trading in sympathy with the common,” the source commented, though he added that the preferreds fared better than the straight equity. “Or it is a reassessment of the business risk of the GSEs. Maybe they aren’t doing as well as people thought.”

© 2015 Prospect News.
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