Oil and gas plays Chesapeake, Nabors fall on lower oil prices; all eyes on Amgen, GM in week ahead

By Ronda Fears and Kenneth Lim

Boston, Feb. 13 - Oil and gas names were in play on Monday, as falling prices of natural gas and crude oil dragged down exposed convertibles. Chesapeake Energy Corp. was among the most active, with the resignation of its co-founder and president added to the mix. Elsewhere in the sector, Nabors Industries Ltd. also saw its convertibles continue the lackluster performance of the previous week.

General Motors Corp. saw muted speculation as word got out that the auto maker would make an announcement on Tuesday about five of its manufacturing sites in Michigan.

In the airlines sector, ExpressJet Holdings Inc. convertibles gained altitude after the company said it would add its 4.25% notes due 2023 into its securities repurchase plan.

But the big news on Monday came after the market closed, with biotech heavyweight Amgen Inc. announcing that it would issue $4 billion of convertible bonds and use $3 billion of the proceeds to buy back shares.

More new deals came from India, with Nahar Industrial Enterprises Ltd. pricing $45 million of five-year zero-coupon foreign currency convertible bonds at 6.25% yield and an initial conversion premium of 30%. Also, Cranes Software International Ltd. said it had was starting roadshows for a planned €40 million offer of foreign currency convertibles.

Amgen to price $4 billion

Thousand Oaks, Calif.-based Amgen plans to price two $2 billion tranches of convertibles - with five-year and seven-year maturities - on Tuesday after the close, market sources said. Talk guides for coupons of 0.125%-0.625% in the five-year notes and 0.375%-0.875% in the seven-years, with initial conversion premiums of 10%-13% each, market sources said.

The senior notes, which will price at par, will be non-callable for the life of the bonds. There is a 130% contingent conversion threshold except for the last month before maturity, when they will be freely convertible. The notes are protected from takeovers through a make-whole premium and a change-of-control put option.

Amgen also plans to enter into convertible-note hedge and warrant transactions to increase the effective premium from the company's point of view to 50%.

Bookrunners Morgan Stanley, Merrill Lynch, Citigroup, JP Morgan and Lehman Brothers will have a greenshoe option of $300 million for each tranche.

Moody's Investors Service will rate the notes A2, while Standard and Poor's will rate them A+.

The convertibles will be distributed under Rule 144A.

Amgen, the world's largest biotechnology company, plans to use about $3 billion of the proceeds to repurchase shares. The remaining proceeds will be used to fund the convertible hedges, working capital and general corporate purchases.

"Using $3 billion to buy back stock is not bad," said a market source involved strictly in biotech stocks. "I can see the stock riding further."

Amgen shares (Nasdaq: AMGN) ended off by 31 cents, or 0.43%, at $71.14 but the stock saw $71.65, higher by 51 cents or 0.72%, in after-hours action.

One convertible fund manager based in New York remarked that the deal "seems irresistible."

Amgen also has a zero-coupon convertible due 2032 outstanding. A sell-side desk marked it at 75.73 bid, 75.85 offered against the closing stock, about 0.09 points below Friday, when the stock was $71.45.

Bad day for oil and gas

Chesapeake Energy convertibles tumbled on Monday along with oil prices. The company also said co-founder and president, Tom L. Ward, had resigned. Chesapeake's 4.5% convertibles due 2054 were traded at 91 against a stock of $29.625 on Monday, about six points lower than a week ago, according to a sell-side source. They changed hands at 97 against $33.75 on Tuesday last week.

Another desk said the 4.5% notes were 89.69 bid, 90.19 offered against Monday's closing stock of $28.68. The stock dropped 3.17%, or 94 cents, on Monday. Chesapeake's 2.75% convertibles due 2035 saw 102.64 bid, 103.14 offered at the close of the session, about 1.5 points down from Friday. The 5% convertibles due December 2049 were quoted at 129.18 bid, 129.68 offered at Monday's close.

Ward, who helped build Chesapeake (NYSE: CHK) into the country's second largest producer of natural gas, said on Monday he was leaving to pursue other interests. Stephen Dixon was promoted to executive vice president of operations and chief operating officer of the Oklahoma City-based company.

Analysts, however, were not expecting the leadership change to have significant impact on the company.

Oil and gas prices also took their toll on Chesapeake. Natural gas futures for March delivery reached their lowest levels in more than a year in New York on Monday, ending at $7.243 per million British thermal units, down 1%. Crude oil prices dropped 60 cents to $61.24 a barrel after reaching a six-week low of $60.85 during the day.

Nabors (NYSE: NBR), which was cut to sell from neutral by Merrill Lynch analysts Alan D. Laws, Michael Farah and Eral Gokgol-Kline last week, continued to slide on Monday. The Bermuda-registered land drilling contractor's zero-coupon convertibles due 2023 changed hands at 117 versus a $73 stock, a point lower than a week ago, said the sell-side source. The convertible was 118.24 bid, 118.49 offered against a $75.11 stock on Tuesday last week, when the Merrill Lynch downgrade was published.

Nabors, which has received puts of 93% of its zero-coupon convertible due 2021 earlier in the month, saw its stock lose 55 cents, or 0.75%, on Monday to close at $72.55.

General Motors to discuss plants

Detroit-based General Motors (NYSE: GM) said on Monday that it would make an announcement the next day about five Michigan plants, but without clear signs of what would be revealed the company's three convertibles had mixed results.

The 4.5% convertibles due 2032 (NYSE: GXM) gained 0.11 point or 0.49% to close at 22.50 against a $22 stock. The 5.25% notes due 2032 (NYSE: GBM), however, were 0.13 point or 0.84% lower at 15.36, while the 6.25% convertibles due 2033 (NYSE: GPM) rose slightly to 17.01, up 0.05 point or 0.29%.

General Motors stock was up 13 cents, or 0.59% on Monday.

Detroit-based General Motors, which recently slashed its dividend by half and cut employee benefits and wages, only said that Tuesday's announcement would have a "positive impact" on the five plants, four of which are in the greater Detroit area.

ExpressJet up on buyback

ExpressJet convertibles got a boost on Monday on news over the weekend that the airline would include its 4.25% convertible notes due 2023 in a $30 million securities repurchase plan. ExpressJet's only outstanding convertible was traded at 86.50 against a stock of $7.20 on Monday. It finished the day at 85.82 bid, 86.82 offered against a $7.09 stock.

The stock was one cent, or 0.14%, lower at $7.09.

Houston, Texas-based ExpressJet said late Friday that it would begin to buy its convertibles from time to time under the share buyback program, which was announced in July 2005. Since the program began, the company has already bought back $5.6 million of stock.

India's Nahar prices notes

India's Nahar Industrial Enterprises Ltd. has also priced $45 million of five-year zero-coupon foreign currency convertible bonds at 6.25% yield and an initial conversion premium of 30%, syndicate sources confirmed.

The bonds, which are due on Feb. 16, 2011, have an initial conversion price of Rs. 200 and will be redeemed at 136.055% of the principal amount at maturity. They may be called after Feb. 15, 2009, at 130% of the principal amount. The conversion price will be reset downwards on Feb. 15, 2008, by up to 10%.

The issuer may force conversion of the bonds from Feb. 15, 2008, subject to a 120% price hurdle.

Bondholders will receive 5% additional bonus shares if they convert the bonds before Feb. 15, 2007, plus an additional 5% if they convert before Feb. 15, 2008.

The bonds enjoy dividend protection for payouts above 1%.

Jefferies International, the bookrunner of the deal, has a greenshoe option of $5 million for 30 days.

Ludhiana-based Nahar Industrial is the listed oil-and-soap and textile division of the Nahar Group industrial conglomerate, which also has businesses in vegetable oils and sugar. Nahar Industrial last year embarked on an expansion plan involving production facilities, retail stores and a co-generation power project costing more than Rs. 8 billion and expected to last to 2008. The convertibles in the new issue are to help finance those plans.

Nahar is the latest in a recent spate of Indian companies issuing foreign-currency convertibles. The syndicate source said there "continues to be strong market demand for Indian companies owing to the strength of the Indian economy and expectations for future growth."

Meanwhile, Bangalore's Cranes Software International Ltd. has started to market its planned €40 million offer of foreign currency convertible bonds. The specialist in scientific and engineering software told the Bombay Stock Exchange that lead manager Barclays Capital will be meeting with prospective investors to discuss the terms of the offer, and the company may begin road shows for issue in the international market.

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