High-yield analysts on the buy- and sell-side are focusing their attention on bonds of companies such as Grey Wolf, Grant Prideco, Parker Drilling Company, and Lone Star Technologies, which sell equipment to oil and gas drillers. While there has been weakness throughout the energy sector due to falling oil and gas prices, analysts say equipment providers have seen their bonds hit the hardest.
Though analysts differ on some of the names they like, they are unanimous in touting Grey Wolf. Robert Chambers, analyst at Lehman Brothers, is one of several who point to the strong cash reserves, which should help it weather the downturn. He also likes Grant Prideco and Parker Drilling. He believes Grant has been dragged down in sympathy with Lone Star, because they both sell oil country tubular goods, or tubulars, which are inserted in wells to keep them from collapsing. But tubulars account for only half of Grant's revenues, and are a more significant part of Lone Star's. Chambers likes Parker Drilling because much of its cash flow depends upon oil producers, and the price of oil was still relatively high late last week.
Between Sept. 11 and last week, Grey Wolf 8.875% notes of '07 (B1/B+) had fallen from a bid of 99 to 90, Grant 9.625% notes of '07 (Ba3/BB) had dropped from 102 to 95, and Parker 9.750% notes of '06 (B1/B+) had gone from 102 to 94. Chambers believes the bonds will recoup those losses over the next 12 months.
Nate Kehm, analyst at Federated Investors in Pittsburgh, says he will look particularly closely at Grey Wolf and Grant, but believes they still have further to fall before turning around. He wants to see the Grey Wolf paper trade into the mid-80's and Grant's at 90 before he takes a serious look. He believes Grant's assets are more valuable than Parker's, which is why he prefers the former company. He is also interested in Lone Star, but will likely wait to see whether it completes its acquisition of a division of North Star Steel, which will increase Lone Star's debt burden.