Energy convertibles weak; Helix Energy down 2.5 points; United Tech mandatories in line

By Rebecca Melvin

New York, July 21 – U.S. convertibles saw ongoing weakness in the energy sector on Tuesday despite a bounce back in crude oil prices above $50 per barrel. The weak tone in the broader markets weighed on the overall convertibles space as traders focused on earnings news.

After the market close Apple Inc. and Microsoft Corp. reported quarterly results that shot down their common stock in after-hours action, promising to weigh on the tech sector on Wednesday.

The tone was “definitely weak,” a New York-based trader said regarding energy.

Positive moves in many energy stocks and higher oil did nothing to cheer convertibles players. There were few bidders after the sector weakened on Monday, sources said.

And “there are no positive catalysts seen in the near term,” the New York-based trader said.

The convertibles of Helix Energy Solutions Group Inc. dropped 2.5 points following disappointing earnings news that pulled the common stock of the Houston-based oil services company down 17%.

Whiting Petroleum Corp.’s 1.25% convertibles due 2020 fell another couple of points to a 93 handle, according to Trace data, after dropping a couple of points on Monday. The bonds were recently above par.

Whiting’s Tuesday move amounted to a further contraction of about 0.5 point as the common shares of the Denver-based oil and gas E&P company rose about 1%.

Secor Holdings Inc.’s convertibles were also down by about 0.5 point. The Secor 2.5% convertible bonds due 2027 were seen at 98.182, and the Secor 3% convertible bonds due 2028 were at 83.08. Secor also has a number of convertible preferred issues. The common shares of the Fort Lauderdale, Fla.-based offshore oil and gas services company were down 0.5%, or about 30 cents, at $64.64.

Chesapeake Energy Corp.’s several series of convertible bonds were also called lower by about a point on Tuesday.

Energy XXI Ltd.’s 3% convertibles due 2018 took another leg lower to the 12.5 to 13 context, after trading at 14 to 15 in recent sessions. But the common shares of the Hamilton, Bermuda-based independent oil and natural gas E&P company popped early Tuesday by about 15%, and they closed up 19 cents, or 12%, to $1.84.

The downturn in the bonds of natural resources companies, such as oil and coal names, has been an ongoing theme in both the convertibles and high-yield straight bond markets.

West Texas Intermediate crude for August delivery was back above $50.00 per barrel after closing down on Monday at $49.96 per barrel.

Cobalt International Energy Inc.’s sister convertible issues were called unchanged on the day, as the bonds of the Houston-based oil and gas exploration and production company have slid multiple points in the past week or so, a New York-based trader said.

“People are not adding in the space,” a trader said. Most hedge funds were trimming and the market was not seeing a lot of outright flow, he said.

Elsewhere the Ryland Group Inc.’s 1.625% convertibles due 2018 looked to be down 0.25 point amid no particular news. “There are better sellers around in those, and the tone is weaker overall,” a trader said.

In the broader market, the tone was down.

United Technologies Corp.’s mandatory convertibles, which mature Aug. 1, moved lower in tandem with the common shares, which were down 7%, after the Hartford, Conn.-based building and aerospace technology company cut full-year guidance, citing weaker sales and headwinds caused by the strong dollar.

The United Technologies mandatories ended down $3.94, or 7% at $52.60.

Exelixis Inc. continued to trade actively at steady pricing a day after its news of a positive late-stage drug study that propelled the 4.25% convertibles up more than 30 points.

Traders were also eyeing Illumina Inc., which was slated to report quarterly results after the market close. The Illumina shares tanked in after-hours action.

Also after the market close, Pattern Energy Group Inc. launched a Rule 144A deal for $225 million of five-year convertible notes.

The notes were seen pricing late Wednesday that were talked to yield 3% to 3.5% with an initial conversion premium of 22.5% to 27.5%, according to market sources.

Helix drops 2.5 points

Helix Energy’s 3.25% convertibles due 2032 were seen at 86.375 bid, 87.375 offered with the underlying shares of the oil services company around $9.41, a New York-based trader said.

The common shares of the Houston-based oil and gas services contractor fell $1.90, or 17%, to $9.40 on Tuesday.

The company reported a second-quarter loss of $2.6 million, or 3 cents per share, compared to a profit of $57.8 million, or 55 cents per share, in the year-earlier period.

The 3-cent-per-share loss was worse than expected.

President and chief executive Owen Kratz said that the second-quarter results were indicative of overall weak industry conditions in the oilfield services sector.

The company posted revenue of $166 million for the period, also missing forecasts.

The earnings were horrible, a trader said.

Market tone is definitely weak with most market players not adding to the space.

“We are not seeing any bids,” the trader said.

Illumina misses estimates

During the session, the Illumina 0% convertible notes due 2019 were last unchanged at 122, according to Trace data, and the Illumina 0.5% convertible notes due 2021 were a little higher, trading at 130.78 from 128 to 130 on Monday.

The common shares of the San Diego-based developer of genetic research tools were down $2.48, or 1%, at $237.54 at the close. But after the close, they fell $21.04, or 9%.

Sales for the quarter were $539 million, which didn’t meet analysts’ estimates for revenue of $542 million average.

Excluding one-time items, earnings per share were 80 cents, compared with the average analyst estimate of 77 cents.

Pattern Energy to price

Pattern Energy, a San Francisco-based independent power company, announced that it was planning to sell $225 million of five-year convertibles via joint bookrunners BofA Merrill Lynch, BMO Capital Markets and Citigroup Global Markets Inc.

Pattern is also pricing up to $125 million of shares of its class A common stock with an option to purchase up to an additional 15% more of shares to cover over-allotments.

Proceeds of both deals are earmarked to repay a portion of the outstanding debt incurred in connection with the company’s purchase of interests in the K2, Lost Creek and Post Rock wind projects, the acquisition of non-controlling interests in the Gulf Wind project and the prepayment of Gulf Wind project level debt and for general corporate purposes.

The bonds are non-callable for life with no puts.

The notes will be settled in cash or shares or a combination of both. They have dividend and takeover protection.

Mentioned in this article:

Chesapeake Energy Corp. NYSE: CHK

Cobalt International Energy Inc. NYSE: CIE

Energy XXI Ltd. Nasdaq: EXXI

Exelixis Inc. Nasdaq: EXEL

Helix Energy Solutions Group Inc. NYSE: HLX

Illumina Inc. Nasdaq: ILMN

Pattern Energy Group Inc. Nasdaq: PEGI

Secor Holdings Inc. NYSE: CKH

United Technologies Corp. NYSE: UTX

Whiting Petroleum Corp. NYSE: WLL

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