A Dozen Energy Plays the Smart Money Is Buying on the Dip

By Michael Brush
Exclusively for InvestorIdeas.com
August 15, 2008

As I guessed might happen back in late May, the speculative bubble in energy prices got zapped.

I was a bit early to the call. But that’s not unusual. Because even when you can make a good case that a bubble will burst, it’s tough to know exactly when it will happen.

Now, there’s only one trend that really stands out as I look over the insider activity of the past two weeks as stocks in this sector have plummeted.

Insiders at energy companies are buying the dip big time.

I’m not talking about the top managers at energy giants like Exxon Mobil (XOM) or BP (BP). Instead, I count at least a dozen small- and mid-cap energy plays where insiders have been aggressive buyers.

Because these are smaller companies, these aren’t the kind of stocks you’re going to hear much about on Fox Business News or CNBC.

But you’ll likely do much better with these energy plays than you would with the giants.

• For one thing, small and mid-cap companies can have more volatility and bigger price swings.
• Even more important, in nearly every case the insiders who are buying have excellent track records.

The insiders buying at the energy companies below have seen their stocks go up anywhere between 92% and 14% in the six months after their purchases, according to Thomson Financial. Out of a dozen energy companies where I spotted significant insider buying, I’ve highlighted the eight where the insiders doing the buying have good records for timing purchases.

This is no guarantee that their stocks are going to go up now, of course.

However, buying alongside smart insiders gives you an edge. As for oil, I’m working on the assumption that it will continue to trade above the $90-$100 level for awhile and below $125. That should be more than enough to keep these companies producing decent growth.

McMoRan Exploration (MMR)

I first wrote about McMoRan Exploration back in March of 2007. Shares of McMoRan had nearly tripled by June of this year, trading above $35.

Since then the stock has retreated to the mid-$20 range. In the pullback, a director has purchased $9.4 billion worth roughly in the $26-$27 range.

But this is not just any director. Robert Day has a history of seeing the stock advance 92% after he buys, according to Thomson Financial.  

McMoRan does exploration and production in the Gulf of Mexico and along the Gulf Coast.

Continental Resources (CLR)

Continental Resources is an oil and natural gas exploration and production company that operates in the Rocky Mountains and along the Gulf coast. The stock has pulled back to $46 from nearly $84 in July.

In the pullback, chief Harold Hamm bought over $2.8 million worth of the stock in the $54 to $58 range. Another insider bought $54,000 worth for about $55 a share.

In the six months after these two insiders buy, the stock has gone up 62% and 63.7%.

Hornbeck Offshore Services (HOS)

Hornbeck Offshore Services provides supply and transport vessels to energy companies doing offshore oil and gas exploration and production in the Gulf of Mexico.

Hornbeck reported a 39% revenue jump in the second quarter, compared to a year ago. Operating income was up 39% on record rates for its offshore services vessels. But revenue from its tug boat and tank barge segment declined because of soft demand for single-hulled vessels, linked to high inventory levels for petroleum products.

Hornbeck stock has pulled back to nearly $41, from $59.40 in June.

In the pullback, insiders with a record of seeing the stock go up 49% and 58% in the six months after purchases, bought $206,000 worth of stock.

Hercules Offshore (HERO)

Hercules Offshore provides jack-up rigs which help companies that drill for oil and gas offshore – primarily in the Gulf of Mexico.

Hercules stock has suffered a nasty pullback to $22 from above $39 in the recent bout of energy stock weakness. Down at these levels insiders have purchased $1.8 million worth of stock.

These are insiders that are worth listening to, because the stock has gone up 52%, 42% and 20% in the six months after purchases by three of them.

Panhandle Oil and Gas (PHX)

I first wrote about Panhandle Oil and Gas here back in early 2007 when it traded for about $18.

By June of this year, it had gone up to nearly $40. After that, it pulled back to the low $30 range. Then it rebounded.

In the volatility, a director with a record of seeing the stock go up 44% six months after purchases bought $101,000 worth at $37.50. That suggests there is a lot more upside despite the gains since I first wrote about this company for Insiders Corner.

Panhandle Oil has oil and gas properties in the Fayetteville shale play in Arkansas, the Woodford and Caney shale in Oklahoma and the Woodford shale in Texas.  Panhandle Oil is a large holding of Robert Robotti, a Panhandle director who’s Robotti & Company Advisors has a long-term record of doing considerably better than the market in part because of a knack for finding promising, but obscure, small companies.

Goodrich Petroleum (GDP)

Goodrich Petroleum explores for and develops oil and natural gas in the Cotton Valley Trend in Texas and Louisiana.

It’s stock has pulled back to $51 from $86 in the recent energy sector route, but it traded as low as the mid $40 range.

Down there, a director with a great record bought $6.5 million worth of stock. Goodrich Petroleum stock usually goes up 44% in the six months after his purchases.

Contango Oil & Gas (MCF)

Shares of Contango Oil & Gas have advanced over ten-fold since I first noticed chief Kenneth Peak  buying $350,000 worth of his company’s stock at $7 a share back in the summer of 2004.

Despite the big rise in his stock, he bought another $2 million worth in the end of July at around $78.50, in the recent pullback in the stock to $76 from above $95 in June.

Two other insiders bought over $900,000 worth at around $76 and $81. The stock had advanced about 42% in the six months after their purchases, historically.

The company’s search for solid natural gas finds in the Gulf of Mexico has proved successful. Now it plans to spin off the Gulf of Mexico holdings with known natural gas reserves and give shareholders an interest in exploration efforts at other Gulf of Mexico leases through a company to be called Contango Energy.

OMNI Energy Services (OMNI)

OMNI Energy provides seismic survey work and other services to energy companies. The stock recently traded down below $4, from above $7 back in June.

The company reported considerably lower net income in the second quarter compared to a year ago, because of a shift towards the kind of seismic drilling that produces lower profit margins.

Insiders at this tiny $74 million market cap company seem to think the market reaction is over done. They bought $480,000 worth of stock in the pullback. OMNI Energy stock has gone up 23% on average in the six months after purchases by one insider, chief Brian Recatto.

Top managers were also buying significant amounts in the recent pullback at these energy and energy related companies: Rosetta Resources (ROSE), Petrohawk Energy (HK), Bristow Group (BRS) and Kodiak Oil & Gas (KOG).

The bottom line: When you see a broad array of buying across a sector like this on a pullback, it’s a sign the sector will probably rebound.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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