Dump gas prospector bonds for pipe maker's, suggests Citi

A recent Citi high yield research report highlights a relative value trading opportunity in the new issue market. It suggests switching out of double B rated natural gas prospector Chesapeake Energy’s 2016 6.875% notes, which at a price of 96 cents in the dollar are equivalent to a 494 basis point spread. Instead, investors could consider buying the 9.5% 2016 bonds issued by McJunkin Red Man, which at 99.5% offer a yield equivalent to a 666bp z-spread.

McJunkin is not an oil and gas producer, but makes its money by selling pipes to the industry. The single B company was hit hard by the industry’s reduction in capital expenditure in 2009, but is poised to benefit from a capex rebound this year. Citi thinks the single B company’s market diversification should insulate its revenue and helps to support its leverage of 2.6 times.

The valuation of Chesapeake bonds, by contrast, seems rich, according to the report, for a company prone to poor hedging strategies and strategic acquisitions.