Transocean convertibles weaker; Schlumberger in trade; trading session otherwise quiet

By Rebecca Melvin

New York, May 24 - In an otherwise quiet session, Transocean Ltd. was weaker and the most active name in the convertible bond market Monday as headlines swirled around the oil rig company and other oilfield services companies in connection with the rig explosion and resulting oil spill that continues to flow in the Gulf of Mexico.

Schlumberger Ltd. was also active in the session on the fallout, with the Schlumberger 2.125% convertibles due 2023, which are going to be called June 6, trading at steady pricing as their underlying shares sank 5%.

Cameron International Corp., which is another convertible name associated with the oil spill disaster, was quiet, however, a New York-based sellsider said.

"The oil service sector was beat up," the sellsider said.

Selling in Transocean stock and in the broader equity markets accelerated going into the market close. One source said the cause of the weakness at the close was related to Obama administration statements about the moratorium on new offshore drilling permits in the Gulf.

The decision on whether to resume issuing offshore drilling permits will be made after Interior secretary Ken Salazar sends a report on the BP oil spill to the White House, which is expected this week.

Secondary muted

Outside of the oil services sector, the convertible market was described as slow. Uncertainty in the broader markets has given players pause, and while there are still a few sellers and reluctant bidders out there in the convertible space, the two sides are not meeting on price very readily, sources said.

Hospitality Properties Trust Co., the Newton, Mass.-based real estate investment trust focused on hotels, traded in size at 99.9 to 100 outright, with the stock at around $21.93, amid no particular news.

Vornado Realty Trust was another REIT in trade. Its 3.875% convertibles traded at 108.5 bid, 108.532 offered versus a share price of $75.67. There were no real drivers seen in these trades, however.

"The most notable thing today is how dead it is," a sellsider said about the convertibles market.

As for how the rest of the week will shape up heading into the Memorial Day holiday weekend, a sellsider said it will probably remain sluggish.

The down market is "running its course. People are not at the point of maximum fear. Bidders are few and far between. Look what would have happened if you bought RIG As last week. It was at 98.5 and now it's a point lower, and that's a pretty safe name."

Another sellsider said he was hearing that broken names, or distressed-type names, were getting looked at, representing holders looking to sell.

"There aren't buyers," the sellsider said.

Transocean weaker

Transocean's 1.5% series C convertibles due 2037, which have lost the most of three sister issues since the well explosion, slipped into the 80s Monday, seen last at 89.125, down from 90.7, according to Trace data.

Transocean's 1.5% series B convertibles due 2037 were at 92.375, down from 93 Friday and down from 97 bid, 98 offered before the incident.

Transocean's 1.625% series A convertibles due 2037, which are putable at the end of 2010 and the most resilient of the three issues, traded at 97.5, which was down from 98.5.

Shares of the Vernier, Switzerland-based company ended down $5.28, or 9%, at $53.96 on Monday in heavy selling that accelerated into the market close.

Monday's headlines included Transocean having filed a request in court to limit its liability in the case, and U.S. officials stepping up their rhetoric to make sure the government keeps its pressure up on BP plc and the other companies involved in the accident until the problem is resolved and all damages are paid for.

There was also a story out there, a sellsider said, that 18 senators want an investigation of Transocean's dividend. The lawmakers don't want shareholders "making a profit" on the disaster, the sellsider said.

"There's a lot of jawboning going on. Transocean was going to distribute $1 billion to shareholders, and trying to make sure that its liability is limited to the residual value of the rig, which is almost nothing, and it is countersuing and it wanted the court to rule on that. BP is suing for excess liability insurance, and they [the media] keep throwing around the word criminal," a New York-based sellside trader said.

"As much as anything else, people are worried about RIG going forward, and what that's going to mean for its future earnings and revenue," the sellsider said.

Meanwhile, FBR Capital Markets upgraded Transocean shares to "outperform" and put an $87-per-share price target on them in a note early Monday.

FBR analyst Robert MacKenzie backed his upgrade saying that if the reason that the Deepwater Horizon's blowout preventer was unable to seal the well was due to it being obstructed by gas hydrate formation, then there is upside potential for Transocean.

Should it be shown that the blind shear rams, which were tested less than 10 hours before the blowout, were obstructed by hydrates, there should be substantial upside for RIG, as the shares have underperformed their peers by 15% since the blowout, MacKenzie said.

"We believe that hydrate formation could explain the anomalous pressure reading that BP disclosed during Congressional hearings, where 1,400 psi was noted inside the drill pipe, but no pressure was measured through the kill line. Numerous reports of such hydrate plugging exist in the technical literature," MacKenzie wrote in his note.

Schlumberger active, steady

Schlumberger's 2.125% convertibles due 2023 traded at 146.625 to 146.675 versus a share price of $59.00 on Monday. The issue isn't generally active in trade.

The convertibles were called steady even as shares of the Houston-based oilfield services company lost $2.90, or 5%.

The convertibles weren't moving in tandem with the shares, a sellsider said. "It has been trading at zero premium anyway, so it's just a common equivalent at this point."

Players may have had the Schlumberger convertibles on different hedges and could have been taking advantage of the lower share price or unwinding the trade prior to the June 6 call.

"It would purely be to unwind and take advantage of the volatility," the sellsider said.

Mentioned in this article:

Cameron International Corp. NYSE: CAM

Hospitality Properties Trust Co. NYSE: HPT

Schlumberger Ltd. NYSE: SLR

Transocean Ltd. NYSE: RIG

Vornado Realty Trust NYSE: VNO

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