Delta, Northwest lower ahead of earnings; Caesars steady; Amerada Hess, oil paper zoom

By Ronda Fears

Nashville, July 16 - It was a typical slow Friday, except perhaps for the few oilpatch names in the convertible universe that saw heavy buying as crude oil hit $41 in reaction to more attacks on pipelines in Iraq.

One sellside dealer remarked that there were more so-called bets on trading desks regarding the sentencing of Martha Stewart than on convertibles, saying most of the pre-earnings posturing had been accomplished earlier in the week.

"The bets on how much jail time she would get were, I think, 9 [months] on the bid side, 13 [months] on the ask right before the sentencing," he said. The celebrity home-stylist, who was convicted of securities charges related to Imclone Systems Inc. stock sales, wound up getting five months of jail time plus five months of house arrest.

While a lot of positioning had already taken place by Friday, traders said there was still some selling in the airline paper, particularly Delta Air Lines Inc. and Northwest Airlines Corp. as they are due to report early next week.

Delta's convertibles were both said to be about 1.5 points lower with the 8s trading down into the upper 40s and the 2.875s at around 54.5, with the stock losing 7.25% to end at $5.50 on Friday. Northwest's 6.625s were down about 2.25 points to the 82.5 neighborhood while the 7.625s lost 3.25 points to 70.5, with the stock closing down over 7% to $8.20.

From news earlier in the week on a $9.4 billion takeover by Harrah's Entertainment Inc., Caesars Entertainment Inc.'s convertible floater was said to be steady in the area of 101.5. And, on the Moody's downgrade to junk, Electronic Data Systems Corp. was also described as steady at about 93.5.

Players scour oilpatch paper

As oil rocketed back above the $41 mark for the first time in about six weeks, several oil and energy-related names saw activity with Amerada Hess Corp. one of the biggest climbers of the day.

Amerada Hess is one of the few major oil names in the convertible universe. A sellside dealer quoted its 7% mandatory due 2006 up 2 points to 76.35 bid, 76.4 offered. On the New York Stock Exchange, the issue closed up 0.18, or 2.42%, to 76.3, while the underlying stock soared $2.67, or 3.26%, to $84.57.

Houston-based Willbros Group Inc., which provides construction and engineering services to the oil and gas industry, had been punished earlier in the week following an earnings warning, but a trader said that the convertible saw some buying as the bonds held up very well against the stock getting whacked.

Willbros said on Wednesday that it expects to report a second quarter loss of 2-7 cents per share, a considerably weaker outlook that its previous estimate of a profit of 1-5 cents per share, citing problems with projects in Nigerian, Venezuela and the U.S.

Also, on Friday, the stock got upgraded by CIBC World Markets, following a conference call on Thursday by the company to discuss its guidance revision.

"The call was reassuring," said a convert trader. "If you believe Willbros will participate in the increased spending in the oil and gas sector, they should have a great next three years."

El Paso buying on dividend

Another energy name, the troubled El Paso Corp., was active and about a half-point to a full point higher on the company's announcement of a stock dividend. A trader said that while a lot of times common dividends smack interest in convertibles, in the case of El Paso it was seen as a vote of confidence from management that piqued buying interest.

El Paso declared a quarterly dividend of 4 cents per share payable Oct. 4 to stockholders of record as of the close of business Sept. 3, for an outlay of roughly $25.6 million.

"When a large company like El Paso begins paying a dividend, it's a strong indication that business is improving. At least most investors generally believe this," the trader said.

"If you just look at this company from the perspective of a rearview mirror, then you'd be in the camp that says it's on the verge of default. I mean El Paso [stock] is almost $8, and Delta is down to $5.50 and they are on the verge of bankruptcy.

"The [El Paso] bonds don't look like a stellar credit, but anyone who bought and held at these, or lower, prices will be laughing all the way to the bank."

He pegged the El Paso 0% convertible due 2021 in the neighborhood of 48.5 bid, 49.5 offered and the 7% mandatory due 2005 at 29 bid, 29.5 offered.

El Paso shares closed Friday up 18 cents, or 2.3%, to $7.99.

Headwaters in energy, building

South Jordan, Utah-based Headwaters Inc., involved in both the energy and building industries, was active Friday although traders said there was little price change.

"The general feeling about Headwaters is that they are going to continue to head up," a sellside trader said. "They are involved in building, and even if that slows down in the near future they're also a big alternative fuels type provider for coal-fired electric generation plants and there has been a lot of talk about the need to boost production in electricity."

The Headwaters new 2.875% convertible due 2016 was seen at 108.5 bid, 109 offered with the stock ending unchanged at $25.09. The company is set to report earnings before the market opens next Thursday.

Headwaters develops and commercializes technologies that enhance the value of coal, gas, oil and other natural resources. Through a proprietary fuels process, the company is involved in the production of coal-based solid synthetic fuels primarily for electric generation. A company unit also makes bagged concrete, stucco, mortar and block products for construction.

A buyside trader said that with a shortage of cement in the construction industry, Headwaters should do well even if building drops off dramatically because of backlog in orders.

"It all comes down to supply and demand, and I have seen industry reports that project there is a shortage in cement that will carryover into 2005," he said.

"Nearly everybody agrees that homebuilding is cooling down, but there is a backlog of construction that will carry into the coming year, maybe through the first half of next year. So, I don't see a crash and burn scenario playing out. Interest rates won't really have a big impact on that, I don't think. These are plans people have already made."

Market seeing two-way action

Early in the week, with a slew of earnings warnings and misses, traders were remarking about virtually everything in the market being for sale. By the latter part of the week, the markdowns were drawing in buyers so two-way activity picked up considerably.

"Its reasonable to infer from increased dealer activity and the observed price action in a bunch of issues that money has been put to work in the market. Several new players, mostly sophisticated investors with experience in the product, have joined in this activity," said a fixed income fund manager.

"In my view, the valuation adjustment we've seen in the [convertible] market these past couple of months was warranted and healthy."

It also created some pockets of opportunity in relative value because of some "overly risk averse" behavior ahead of the Fed and the traditional weak summer period.

"For instance, a number of convertibles of small or mid cap issuers have been pricing in high likelihood of premium destroying events - either cash takeover or lower realized stock volatility," he said, without mentioning any specific names. "There are been several interesting trades come out of this particular theme."

Another factor in increased two-way action, he said, is the "greatly curtailed deal calendar, leaving us little alternative but to re-evaluate what's out there."

"The market may not offer outstanding returns, however relative value based security selection should work again in the generation of acceptable, albeit lower than historical, absolute return," the fund manager said.

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