Energy names dip; Southwestern Energy slumps; Cobalt contracts; Trinity Industries expands

By Rebecca Melvin

New York, Feb. 19 – U.S. convertible energy names ended on a down beat on Friday after ticking up earlier in the holiday-shortened week along with a rebound in some beaten-down equities.

U.S. financial markets were closed on Monday in observance of Presidents Day.

Southwestern Energy Co.’s convertibles were notably weaker but slightly outperformed the underlying common shares after a rating downgrade by Moody’s Investors Service to junk from lower medium-grade credit.

The Moody’s rating action included 10 energy exploration and production companies. Moody’s said Southwestern’s downgrade reflected its low capital efficiency tied to natural gas prices, elevated leverage metrics, and reserve concentration risk in the Fayetteville and Marcellus Shales.

Cobalt International Energy Inc.’s convertible bonds also fell with lower shares. The convertible bonds contracted about a point on a dollar-neutral, or swap, basis, a New York-based trader said. The Cobalt convertibles were notable in that they missed out on a rebound that other energy names enjoyed earlier in the week, the trader noted.

“They didn’t move up earlier in the week,” he said.

Shares of the Houston-based oil-focused exploration and production company fell 14% to $2.10 on Friday.

Meanwhile, Whiting Petroleum Corp.’s 1.25% convertibles slipped back down to 36 to 37, after adding back 2 points on Thursday to about 38.5.

“Volumes are so light and price swings so drastic. The poor liquidity is exacerbating price moves. But today everything is definitely under pressure,” the trader said regarding energy convertibles.

Trinity Industries Inc. also fell on an outright basis, but the convertibles of the Dallas-based maker of rail cars expanded on a dollar-neutral basis by a point.

Trinity’s 3.875% convertibles due 2036 were quoted at 102.5 against its common shares at $16.00. The Trinity bonds had been at about 111. Meanwhile, Trinity’s shares fell 22%. The company reported earnings and disappointing guidance late Thursday.

Greenbrier Cos. Inc.’s convertibles were also sharply lower in tandem with the common stock of the Lake Oswego, Ore.-based railcar company. The Greenbrier 3.5% convertibles due 2018 were indicated down about 5 points to 96.75 from about 102.4, according to a pricing source. Shares fell $2.56, or 10%, to $23.05.

Iconix Brand Group Inc.’s 2.5% convertible bonds were higher but not much was trading compared to very active trade on Thursday. The Iconix’s 2.5% convertibles due in June were up to 96.85 from 91 to 93.25 on Thursday.

“ICON should be better. They’re quoted higher, but only a handful [of trades],” a New York-based trader said.

The Iconix shares popped in the early going to as high as $8.80, but pared those gains to close up only 1.7% to $7.90.

News boosting the securities was that the company confirmed it will restate historical financial statements following the receipt of a letter from regulators.

The Securities and Exchange Commission’s letter was related to technical accounting standards and the company has responded to all the questions raise, according to a release.

The restatement won’t impact free cash flow, the company said.

Iconix is a New York-based brand management company that licenses and markets 35 consumer brands, including Rampage, Mudd, Candie’s and Joe Boxer.

Some energy drops hard

Southwestern Energy’s 6.25% mandatory convertible preferred shares fell $2.65, or 13.6%, to $16.80 on the New York Stock Exchange. But the drop outperformed the $1.40, or 16.5%, plunge in Southwestern Energy’s common shares, which left the stock at $7.09.

Moody’s cut Southwestern Energy’s unsecured notes by four notches to B1, or highly speculative, from Baa3, which is considered investment grade, and took the corporate family rating to B1.

Southwestern Energy priced $1.73 billion of the $50-par series B mandatory convertible preferred stock initially on Jan. 15, 2015 and they are mandatorily convertible into shares on Jan. 15, 2018.

The rating agency pointed out that Southwestern Energy has had increasing leverage since early 2015. This was partly due to large Appalachian acquisitions that were financed by debt.

Along with the rest of its sector, Southwestern Energy has also experienced decreasing earnings due to weakening natural gas prices. Moody’s said natural gas prices are expected to remain low and range-bound over the next several years.

The deterioration in energy prices has depleted Southwestern Energy’s inventory of economic drilling locations. “Nevertheless, the B1 CFR is supported by its low finding and development costs which are among the best in the industry, and management’s historically conservative financial philosophy which has included the strategy of issuing common equity and selling assets in efforts to preserve balance sheet strength,” Moody’s said in its rating action.

“The rating also reflects the likelihood for some further cost reduction and Moody's expectation that Southwestern will not outspend cash flow from operations materially.”

In the same rating action, Moody’s also downgraded seven other companies, including Anadarko Petroleum Corp. and Hess Corp., which were both dropped to Ba1 or junk status, from Baa2.

Cobalt, Whiting down

Cobalt’s convertibles dropped on Friday, with the Cobalt 2.625% convertibles quoted at 41.5 and the Cobalt 3.125% convertibles quoted at 35.

Whiting was down to 36 or 37 after having caught a bid earlier in the week.

The Whiting convertible “is pretty cheap relative to the Whiting straights,” a New York-based trader said.

Mentioned in this article:

Cobalt Energy International Inc. NYSE: CIE

Greenbrier Cos. Inc. NYSE: GBX

Iconix Brand Cos. Inc. Nasdaq: ICON

Southwestern Energy Co. NYSE: SWN

Southwestern Energy Co. preferred NYSE: SWNC

Trinity Industries Inc. NYSE: TRN

Whiting Petroleum Corp. NYSE: WLL

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