Chesapeake Energy mixed to slightly better as oil falls; Gilead eases; Sciele gains on buyout bid

By Rebecca Melvin

New York, Sept. 2 - Chesapeake Energy Corp. convertibles were mixed to slightly better Tuesday as energy and commodity stocks slumped after Hurricane Gustav left relatively unscathed the drillers and refiners of the Gulf of Mexico region, sending fuel and metals prices tumbling.

Crude oil prices fell to as low as $105.46 a barrel, the lowest since April 4, and natural gas slid 7.8% to $7.33 per million British thermal units, an eight-month low.

Chesapeake also announced that it sold a stake in its Arkansas shale assets to BP America for $1.9 billion, which was seen as positive from the perspective of convertible holders as it represented a way for the company to raise money without issuing another convertible, a New York-based sellside trader said.

Among coal names, Peabody Energy Corp. and Alpha Natural Resources Inc. were each down about 10 points outright, but held in line pretty well on a dollar neutral basis.

Elsewhere, Gilead Sciences Inc. was a little lower after Banc of America Securities downgraded its shares to "neutral" from "buy" on what the bank analyst saw as weakness in its HIV therapeutics drugs.

But Sciele Pharma Inc. jumped 3 to 5 points dollar neutral and its shares surged on news the Atlanta-based drug maker accepted a buyout offer from Japanese drug maker Shionogo and Co. for $1.4 billion, or $31 a share, a hefty 57% premium over Sciele's Friday closing price.

Meanwhile, Alliance Data Systems Corp., a Dallas-based marketing and transaction services company, which has seen trading in its convertibles in recent days, was active again, up with its stock, on no particular news, according to a New York-based sellsider.

The market wasn't overly active, but it was perhaps a touch more so than usual for the Tuesday after a long holiday weekend, market players agreed.

Chesapeake mixed to a little better

Chesapeake's 2.75% convertibles due 2035 traded Tuesday at 133.875 versus a share price of $45.20 on Tuesday, compared with a close on Friday at 140.125 bid, 140.25 offered versus a share price of $48.40.

Chesapeake's 2.25% convertibles due 2038 (Cusip: 165167CB1) traded at 90 versus a share price of $45.25, compared to a close of almost 94 on Friday.

"It was mixed. The 2.75s were in a little, and the 2.25s were up a little dollar neutral. The overriding theme was that people expected a volatile move, betting that oil would come in, and these held up relatively well," a New York-based sellside trader said.

The fact that the Oklahoma City-based natural gas company was selling parts of its business wasn't seen as a negative. "Chesapeake is always in a funding mode, and from a convert perspective, they like the fact that they aren't doing another convert, which always pull in the price a little of existing issues," the sellsider said. Instead the company is able to raise cash for its drilling in other ways, he added.

An analyst at Tudor Pickering Holt & Co. pointed out, however, "we thought they'd get more," but still the deal was a "nice endorsement from a major," the analyst's research note stated.

Chesapeake announced Tuesday that it had sold a 25% stake in its Fayetteville Shale assets in Arkansas to BP America for $1.9 billion. The letter of intent comes just a month after BP America bought Chesapeake's Arkoma Basin Woodford Shale assets in Oklahoma for $1.7 billion.

Chesapeake's Fayetteville assets currently have net production of about 180 million cubic feet of natural gas equivalent and include about 540,000 net acres of leasehold. BP will own about 135,000 net acres of this leasehold, and Chesapeake will own about 405,000 net acres.

Natural gas prices have come off recently, but earlier this year they were very high and the promise of vast reserves have prompted exploration and production companies to snap up acreage in shale fields in North America.

Chesapeake shares (NYSE: CHK) closed down $3.16, or 6.5%, at $45.24.

Among other energy convertible names mentioned in trade Tuesday were coal companies, which saw their stocks slide on fears that lower oil and natural gas prices may cut into demand for coal by electric utilities.

Peabody Energy's 4.75% convertibles due 2066 traded at 117 versus a share price of $55.50 during the session and were seen closing at about 116 versus a share price of $55.42, compared to 127.97 versus a share price of $62.95 on Friday.

Shares of the St. Louis-based coal company (NYSE: BTU) slumped $7.53, or 12%, to $55.42.

Alpha Natural Resources' 2.375% convertibles due 2015 closed at 186.5 versus a share price of $92.50, compared with 197.48 versus a share price of $99.10 on Friday.

Shares of the Abingdon, Va.-based coal company (NYSE: ANR) closed down $6.60, or 6.7%.

On the last day of June, Alpha Natural's convertibles traded at 174 versus a stock price of $85.00.

Gilead down dollar neutral

Gilead's 0.5% convertible senior notes due May 2011 were seen ending the day at 136.5 versus a share price of $50.28 on Tuesday, compared with 144.937 versus a share price of $52.68 on Friday.

Gilead's 0.625% convertible senior notes due May 2013 were seen ending Tuesday at 140ish.

Shares of the Foster City, Calif.-based biopharmaceutical company (Nasdaq: GILD) closed down $2.40, or 5%.

"It traded a little lower dollar neutral," a sellside trader said of the convertibles.

Gilead engages in discovery, development and commercialization of therapeutics for the treatment of infectious diseases.

Sciele gains on buyout bid

Sciele Pharma's 2.625% convertibles due 2027 were seen closing at 116 versus a share price of $30.67, compared to 90.625 versus a share price of $19.27 on Friday.

Shares of Sciele (Nasdaq: SCRX) shot up $11.40, or 60%, on the day.

The bonds expanded 3 to 5 points depending on the delta being used.

"It was a nice kiss for holders. The M&A market as a whole has slowed down, but we are seeing a resurgence in health care, with King trying for Alpharma and Millennium getting bought a while back, so people are taking a second look," a sellside trader said.

Shionogi and Sciele announced the deal Monday. Upon completion of the acquisition, Sciele will become a wholly owned subsidiary of Shionogi and will continue operations in Atlanta as a stand-alone business unit.

The deal is still subject to clearance under the Hart-Scott-Rodino act and other customary conditions.

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