Cheniere deal, earnings boost convertible market's energy names; biotech eases slightly

By Rebecca Melvin

Princeton, N.J., July 22 - Some energy names in the convertibles market gained smartly Friday amid earnings news from notables including Schlumberger Ltd. and Halliburton Co. A new deal from Cheniere Energy Inc. traded up in the after market, helping support the sector.

But names in biotech and technology were mostly quiet with some paper weaker like that of CV Therapeutics Inc. and Ivax Corp. But Lowe's Cos. continued to gain, extending gains for more than a week.

The stock of Halliburton, Schlumberger and Occidental Petroleum closed at 52-week highs Friday after the companies reported sharply higher earnings in the second quarter. Transocean Inc. stock also gained, but its convertibles didn't match the climb after it announced a total of $534.4 million in principal of its 6.625% notes due 2011 had been tendered, representing 76.3% of the outstanding principal amount.

Cheniere blasts upward

The new 2.25% convertibles of Cheniere Energy jumped out of the gate Friday to 103 and closed higher at 108.5, according to market sources, who eyed the cheap deal on a day when energy in general was charging forward.

Cheniere Energy sold $300 million of seven-year convertible notes to yield 2.25% with an initial conversion premium of 10% in an overnight deal via sole bookrunner Credit Suisse First Boston.

The Rule 144A issue of convertible senior unsecured notes has an over-allotment option for $25 million.

Market players thought the issue was cheap, but they were skeptical about the Houston-based LNG company's business plan. It has no revenue, one buyside source said.

But another buyside source said, "Who needs a business plan if the convertible terms are good enough? This should be a profitable arbitrage regardless."

One estimate put the deal at 2% cheap assuming the stock opened down 3%. But it opened up flat, at $32, so it was considered 5% cheap using a credit spread of Libor plus 500 basis points and a 50% stock volatility, a New York sellside analyst said.

But because stock borrow is very difficult for Cheniere Energy, a 3.5% cheap valuation could be pegged to the issue, reflecting 0% rebate on stock borrow, the same analyst said.

Another big sellside shop didn't jump into the after market. "Were going to let this season a little bit," an analyst for the shop said. "It came very quickly and the name isn't well known in convertibles."

Cheniere Energy, which develops LNG receiving terminals and is engaged in exploration and production in the Gulf of Mexico, intends to use $70 million of the proceeds for costs related to hedge transactions. The balance of the deal will be for general corporate purposes.

Oil names jump

The 2.125% B tranche convertibles of Schlumberger gained 3 to 4 points Friday as its stock jumped following positive earnings news.

The issue was within reach of parity early in the session, a sellside analyst said. "The premium has collapsed and it's trading like stock. At 144.5 it has a negative 0.7% yield to put, up 12," the analyst said.

Early in the session, the 2.125% B tranche due 2023 was at 115 versus a stock price of $78, the analyst said.

Later the paper was quoted at 116.59 bid, 117.09 offered, compared to 112.92 bid, 114.42 offered on Thursday, according to another sellside shop. The shares closed on the New York Stock Exchange Friday at $82.28, up $4.32, or 5.54%.

Schlumberger's 1.5% convertible A tranche bonds due 2023 moved up to 120.56 bid, 121.07 offered, compared to 116.46 bid, 116.95 offered on Thursday.

The Houston-based oilfield services provider reported a 36% jump in profit for its second quarter and said it sees continuing strong demand amid a lack of capacity as customers step up oil exploration and production activities in the face of rising prices.

The company also had a sharp rise in operating margin as activity increased.

Its second-quarter earnings rose to $482.2 million, or 80 cents per share, from $355.6 million, or 59 cents per share, in the year-earlier period. Income from continuing operations grew to $473.2 million, or 78 cents per share, from $257.3 million, or 43 cents per share, last year. Revenue rose 21% to $3.43 billion.

Halliburton convertibles jumped as much as 9 points, although it was suspected that trading activity was less. The 3.125% convertible due 2023 was up to 149.203 bid, 149.703 offered, compared with a price of 139.73 offered, 140.23 bid on Thursday, according to a sellside shop.

Halliburton, another oil services company, reported after the close Thursday that an influx of new government contracts at its KBR and energy services units drove it to a second-quarter profit of $392 million, or 78 cents per share, compared with a loss of $667 million, or $1.52 per share, last year.

The year-ago loss included a $200 million loss from an offshore engineering, procurement, installation and commissioning project in Brazil.

The convertibles of Diamond Offshore Drilling Inc., CenterPoint Energy Inc., Arch Coal Inc., Amerada Hess Corp. and Weatherford International Ltd. were all higher on Friday.

But the convertibles of Transocean did not perform so well. Its 1.5% convertible due 2021 traded just slightly higher Friday at 102.28, compared to a level on Wednesday of 101.55 bid, 102.055 offered.

Transocean shares gained $3.35, or 6.1%, to $58.67.

Biotechs extend losses

The convertibles of CV Therapeutics were down more than a point compared to Thursday but still well up on where they were earlier this month. The Palo Alto, Calif.-based biotech's 2.75% convertibles due 2012 were down to 163.53 bid, 164.033 offered, off from the 165 level on Thursday. The drop came amid a lull that took hold of biotechs earlier this week following a run up before and after the stellar earnings reported by Amgen Inc.

CV Therapeutics, which is expected to report its earnings Aug. 8, saw its shares end Friday down 35 cents, or 1.29%, at $26.82.

The 2.75% convertible on July 11 was at 152 bid, 153 offered versus a stock price of $24.75.

The convertibles of generic drugmaker Ivax Corp. sagged about 2.5 points as its share price dropped 2.89%. The Miami-based company's 1.5% convertible due 2025 was at 115.163 bid, 115.663 offered.

Meanwhile Mooresville, N.C.-based home improvement retailer Lowe's Cos. Inc. saw its convertibles extend gains amid a small bump in its stock.

The 0.861% convertible due 2021 was up slightly at 114.384, compared with 113.615 on Thursday. Its shares added 48 cents, or 0.74%, to $65.73.

Manor Care eyes deal

Trading of the convertibles of Manor Care Inc. appeared to be light after company reported a 6% drop in its second-quarter earnings, with no trading sources reporting trades. But the online NASD trade site said the 2.125% convertible issue due 2023 traded Friday at 129.

Shares of the Toledo, Ohio-based owner and operator of long-term care centers gained 17 cents, or less than 0.5%, to $36.67.

In explaining its earnings, the company said that it had refinanced a longer, larger revolver and may repurchase shares with funding from a new securities offering.

The company didn't specify what type of securities it planned to offer but said the financing would be along the lines of deals it has done in the past.

In 2003 the company issued $90 million of convertible senior notes due 2023 to repurchase company shares.

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