Energy names continue rise on oil price surge; Rite Aid off on results; PetSmart pops; Frontier firms

By Paul Deckelman

New York, Jan. 3 – Activity in distressed debt and in the notes and bonds of otherwise underperforming companies was seen by traders to have picked up on Wednesday from Tuesday’s relatively sedate first session back after the long New Year’s holiday break, in line with a generally busier pace in the overall high-yield bond market.

For a second consecutive session, oil and natural gas credits were the main upside driver, as traders saw sharp gains in the likes of oil and gas exploration and production operators California Resources Corp., Denbury Resources Inc., EP Energy Corp., MEG Energy Corp. and driller Noble Holding International Ltd.

Those energy names, in turn, were fueled on their upward climb by a sharp spike in crude oil futures prices, which hit their highest levels since early 2015 on Wednesday, pushed upward by a combination of supply concerns in the wake of continued anti-government protests in key global oil producer Iran, as well as a falloff in U.S. crude oil inventories.

Natural gas provider Chesapeake Energy Corp.’s bonds also firmed solidly for a second straight day on expectations of increased natural gas demand throughout much of the United States, as a monster “bomb cyclone” winter storm approached the Northeast and frigid temperatures prevailed throughout much of the country.

Away from the energy sphere, traders saw Rite Aid Corp.’s notes slide after the drugstore chain operator reported quarterly results that included a drop on comparable-store sales and lower-than-expected revenues.

But fellow retailer PetSmart, Inc.’s bonds were solidly better.

And embattled telecom provider Frontier Communications Corp.’s paper was also firmer.

Oil rise fuels energy advance

A trader declared that “anything energy-related was obviously outperforming today.”

He noted that crude oil prices traded up by as much as $1.50 per barrel during the session before coming off those peak levels, but still ending up handsomely on the day.

He continued that the key domestic benchmark crude grade, West Texas Intermediate “is just under $62 now, giving another leg up on these names.”

February-delivery WTI ended up $1.26 per barrel on the New York Mercantile Exchange, settling at $61.63, after having hit an intraday high point of $61.97.

Those levels were the highest that light, sweet crude has traded at since early in 2015, when prices were around there on their way lower as part of the great slide in crude seen in 2014-2015 and beyond.

The key international crude grade – March delivery North Sea Brent crude – closed up by $1.27 per barrel on Wednesday in London futures trading, settling at $67.84.

Both WTI and Brent were recovering from minor losses seen on Tuesday – a nickel per barrel for WTI and 30 cents per barrel for Brent – which had followed three straight better sessions for both crude grades.

Analysts said that crude prices were being pushed up on speculation that the current political turmoil in major producer Iran – the third-biggest producer in OPEC – might disrupt its flow of crude onto the world market.

They also noted that U.S. crude oil inventories fell by 5 million barrels in the week to Dec. 29, according to industry group the American Petroleum Institute, declining to 427.8 million barrels – a statistic seen as bullish for replacement sales.

The commodities markets will get further domestic supply data to mull over on Thursday, when the official U.S. Energy Information Administration storage and production data is scheduled for release.

Energy names dominate

Against that backdrop of surging crude prices, a trader said that the widely followed oil and gas sector bellwether issue – Los Angeles-based E&P operator California Resources Corp.’s 8% senior secured second-lien notes due 2022 – continued to stand out.

“The CRCs were up 1½ points [Tuesday], and again [Wednesday] they were trading up, by almost 2 points at 86½ bid.”

A second trader confirmed those levels, adding that the CalRes bonds had firmed “on heavy volume,” with more than $39 million of turnover on the day.

“They were followed directly by EP Energy,” he said, with the Houston-based oil and gas company’s

8% notes due 2025 zooming by 4½ points, to 79½ bid. He estimated volume in the credit at over $33 million.

Its 6 3/8% notes due 2023 also saw huge gains, ending up 4¾ points on the day at 59 bid, but on not-so-huge volume of only around $3 million, a market source said.

Calgary, Alta.-based MEG Energy’s 6 3/8% notes due 2023 were up almost 3¾ points at 89¾, a trader said, but on only “a handful” of transactions.

A trader saw Oklahoma City-based oil and gas company Continental Resources, Inc.’s 4 3/8% due 2028 up 1 point at 100¼.

Plano, Texas-based sector peer Denbury Resources’ 5½% notes due 2022 soared by nearly 5 points on the day, to just over 73 bid, with over 12 million having changed hands.

Among the energy drilling companies, whose success is directly tied to that of the E&P companies who hire them, a trader said that Cayman Islands-based Noble Energy’s 7¾% notes due 2024 traded up 3¼ points, to 89½, on “heavy volume” of more than $32 million, while its 8.70% notes due 2025 were up 2¾ points at 83 on $12 million of volume.

London-based driller Ensco plc’s 5.20% due 2025 were up more than 3 points to 89 bid, with $16 million of that paper having moved around.

Chesapeake firming continues

Also in the energy sector, Oklahoma City-based natural gas and oil exploration company Chesapeake Energy’s 8% notes due 2027 saw another strong day, a trader seeing them up 1½ points at par, matching the gain notched on Tuesday.

The issue rose even as natural gas prices came down from the highs at which they had closed on Tuesday, finishing off by just under 5 cents per 1 million British Thermal Units, equivalent to 1,000 cubic feet of gas.

Those gas prices still held above $3 per MMBtu, well up from their recent low close of just below $2.60, recorded Dec. 21.

Analysts said that expectations of a continued colder-than-anticipated winter in the Northeast and other parts of the U.S. were the key driver behind the recent gas price rise.

Non-energy credits firm

A trader said that the story of the day was “all pretty much energy – up, up, up.

“Energy names were the top two, three, four most active names,” and dominated the rest of the Most Actives list as well.

He added outside of [energy], nothing really moved significantly, either way.”

Among the non-energy credits, he said that “Frontier is the first non-E&P you get in there” on the Actives list. He saw the Stamford, Conn.-based wireline telecommunications company’s 11% notes due 2025 up almost 2 points on the day at 75 3/8, with over $31 million traded.

And he saw “some activity” in Canadian drug manufacturer Valeant Pharmaceuticals International Inc. – its 6 1/8% notes due 2025 were up 1 point, to 23, with over $26 million traded.

The Laval, Que.-based company’s recently priced 9% notes due 2025 were up ¾ point, at 105 1/8, on volume of over $20million.

Rite Aid in retreat

One of the few downsiders on the day was Rite Aid Corp.’s 6 1/8% notes due 2023, which fell by 1¾ points to end at 89¾ bid, on volume of nearly $20 million.

The pullback was in line with an easing in the Camp Hill, Pa.-based drugstore chain operator’s New York Stock Exchange-traded shares, which eroded by 2 cents, or 0.94%, in regular trading, ending at $2.11, and which then lost an additional 14 cents, or 6.64%, in after-hours trading, finishing at $1.97. Volume of 43.6 million shares was almost twice the norm.

The bonds and shares fell after the company’s announcement of its latest quarterly results – which included

smaller-than-expected revenue numbers, which fell 5.6% to $5.35 billion, well below Wall Street’s expectations of nearly $7.5 billion.

Rite Aid blamed the drop on declining reimbursement rates and a drop in comparable-store sales, the key retailing industry performance metric.

Rite Aid's sales in stores open at least one year fell by 2.5%, paced by a 3% decline in retail pharmacy sales and a 12% slide in its pharmacy services revenue.

It was the sixth consecutive quarter of sagging year-over-year comp-store sales results.

PetSmart paper pops

Elsewhere among the retailers, though, traders saw Phoenix-based PetSmart, Inc.’s 8 7/8% notes due 2025 up more than 3 points on the day, at 64½ bid, while its 7 1/8% notes due 2023 improved by more than 2½ points, to 63 7/8%.

But both of those rose on “only a handful’ of large-sized trades, one trader observed.

© 2015 Prospect News.
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