Alpha Natural slips on output cut; Molina rebounds; Navistar recoups dollar neutral

By Rebecca Melvin

New York, June 8 - A few energy names were in focus in the convertible bond market on Friday and a pair of names that had been pummeled Thursday - with mixed results - improved, in what was otherwise a quiet session, market sources said.

Alpha Natural Resources Inc. convertibles slipped slightly against about a 3% stock hit after the Bristol, Va.-based coal producer said it will cut output and idle some Kentucky coal mines, close others being operated by contractors, and close satellite offices. The Alpha Natural convertibles traded at 84 during the day.

Patriot Coal Corp.'s convertibles weren't active and looked about unchanged in the mid-50s against a 10% drop in the underlying shares, which some viewed as a sympathy move with Alpha Natural.

"I think it's down on Alpha Natural cutting production," a New York-based trader said of the Patriot Coal shares.

Chesapeake Energy Corp. convertibles were flat to slightly higher as its stock was modestly higher amid word from the Oklahoma City-based natural gas company that it has agreed to sell its interests in Chesapeake Midstream Partners LP for $2 billion to Global Infrastructure Partners and will raise $2 billion more by divesting its pipeline development unit and some central U.S. conduits to Chesapeake Midstream.

Elsewhere, Molina Healthcare Inc. was higher outright and better again on a dollar neutral, or hedged, basis as the underlying shares rebounded on news that the Long Beach, Calif.-based health management organization won back its business in the state of Ohio as a Medicaid plan provider.

Molina had protested being cut as a provider in April.

Molina shares recouped 26% Friday after plunging 31% on Thursday after the company pulled full-year guidance due to cost problems in its Texas Medicaid market.

Navistar International Corp. was also several points better outright and 0.5 point better dollar neutral as its stock rebounded 18% Friday from heavy losses Thursday.

Otherwise, the convertible market was very quiet Friday, with many players in a wait-and-see mode pending developments in Europe.

"Today was terrible. It was really, really slow," a New York-based trader said. "People are in a holding pattern waiting to see what happens in Europe, and there is a lot of political and economic data due out this month, and Fed speeches and such."

"If people don't have a view, they are just staying neutral. I am not particularly thrilled or aggressively adding to names in a month like this," the trader said.

Alpha slips, Patriot weak

Alpha Natural's 2.375% convertibles due 2015 traded at 84 on Friday, which was down 0.25 point, according to Trace data.

Alpha Natural shares fell 25 cents, or 2.6%, to $9.32.

The Bristol, Va.-based coal producer said it will idle four mines in Kentucky, close more mines being operated by contractors and curtail production at other facilities. About 150 jobs will be eliminated.

The changes will cut thermal coal shipments by an additional 2 million tons in 2012 and 4 million tons in 2013. The company reiterated shipment guidance for 2012.

The company lowered its 2012 outlook target earlier this year to 100 million tons to 116 million tons from a previous goal of 107 million tons to 124 million tons.

Satellite offices in Richmond, Va., Denver, Latrobe, Pa., and Linthicum Heights, Md. will be closed by the end of the year to consolidate support functions, the company said.

Due to a mild winter in the United States and lower natural gas prices, which have encouraged power plants to switch to natural gas from coal where possible, demand for coal has fallen, the company has said.

Meanwhile, a retail offer on 250 bonds was heard Friday for Patriot Coal's 3.25% convertibles due 2013 at 57.5, but without a bid.

The Patriot bond was 54 bid, 57 offered on Thursday, and was likely still in that range, a New York-based trader said.

A second sellsider also thought the price was in the mid-50s.

Chesapeake flat to higher

Chesapeake's 2.75% convertibles due 2035 were seen nearly unchanged at 90 bid, 90.5 offered, according to a New York-based trader.

The Chesapeake 2.5% due 2037 looked unchanged dollar neutral and one of the two 2.5% convertible issues stood at about 86.

Chesapeake shares were up 51 cents, or 2.9%, at $18.36.

"It looks unchanged to me," a trader said, attributing improvement of late by the cash-strapped company to "shedding a bunch of assets."

Meanwhile, Chesapeake held its annual shareholders meeting on Friday and shareholders expressed their dissatisfaction with the direction the company is going with a series of no votes including voting down the company's executive compensation packages

Molina bounces back

Molina Healthcare's 3.75% convertibles due 2014 traded up to 108.25 versus the stock near its high mark of $23.37 on Friday. The paper was also seen trading at 107. The improvement on a dollar-neutral basis that was on top of a 1.5 to 2 point improvement on Thursday, when the paper went out at 101.25 bid, 101.75 offered by the close, versus an underlying share price of $17.77.

The improvement depended on the hedge. On a light delta of 20%, the dollar-neutral improvement was around 0.5 point. But some players were on a heavier delta of as much as 40%.

"It was pretty active," a trader said.

Molina won contracts to continue as Medicaid plan providers in the state of Ohio. Molina protested in April after they did not figure among the five plans that were initially selected to service the state's Medicaid members.

Ohio represented about 25% of Molina's earnings last year.

The turf battle among Medicaid plan providers is not over. Aetna which lost out this time is likely to contest the decision.

Navistar expands

Navistar 3% convertibles due 2014 traded last at about 95 bid, 95.5 offered versus the stock close of $28.36. That was up from about 92.5 on Thursday and up from early Friday trades at 93.5.

That was an improvement of about 0.5 point on a dollar-neutral basis, a New York-based trader said.

"So that's good, it got a little bit back even though it is not fully whole from before the move down," he said.

On Thursday the convertible was called lower by 1 point to more than 4 points dollar neutral depending on delta.

"If you set them up light yesterday, you did well, and if you're outright, you're happy" he said.

The stock and bonds of the company tanked Thursday on dismal earnings and slashed guidance. Attributed for driving the recovery Friday was news that Icahn lifted his stake in the company to 11.9% from 10.6%, according to a regulatory filing.

But this news wasn't a factor for everyone. "There are still no details on it. The guy has a mixed track record, so you don't want to look at him necessarily," the trader said.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Chesapeake Energy Corp. NYSE: CHK

Molina Healthcare Inc. NYSE: MOH

Navistar International Corp. NYSE: NAV

Patriot Coal Corp. NYSE: PCX

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