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Insider Money Says the Rally’s Not Over For These Four
Natural Gas Plays
By Michael Brush
January 14, 2005
With natural gas stocks tripling or more in the past two years, you might
think there’s little life left in this group.
But the shortage of readily accessible natural gas in North America – which
will sustain high prices for this energy source – tells me there’s still
room for more upside.
To find some of the stocks with the best potential, we looked for companies
where insiders are still buying despite the gains in their shares. At least
four energy companies stand out.
Chesapeake Energy (CHK)
It’s hard to ignore the impressive buy signal from insiders at this energy
company where managers have an outstanding record for purchasing both their
own shares and solid energy reserves.
Last year, Chesapeake insiders bought $17.2 million worth of their own stock
starting in June. Significantly, they started at $13 and kept buying as the
stock moved up. To be sure, there’s been some selling. But in early January,
chief executive Aubrey McClendon was back purchasing 50,000 shares at $15.57
-- after the stock retreated from $18 in November.
Given all the buying he already did last year, that’s conviction. And he’s
got the track record to back it up. His stock – on average – rises 65% in
the six months after he buys, says Thomson Financial.
Bottom line: Chesapeake managers are known to be savvy at buying reserves,
and the insider activity tells me they’ve been scoring solid assets that
will propel this stock higher in 2005.
Goodrich Petroleum (GDP)
Since April 2004 insiders at Goodrich Petroleum have done nothing but buy
their own stock, even as it marched higher. They snapped up a sizable $10.9
million worth – including December purchases near current levels, or $16 per
share.
Goodrich produces oil and natural gas. Recent acquisitions of fields in the
Cotton Valley Trend in Texas and Louisiana should provide several years
worth of low-risk drilling opportunities and above average growth, says Paul
Ferretti, an analyst with Ladenburg Thalmann. He expects 27% growth next
year, on the heels of similar results for 2004. But 2005 growth could jump
to 45% if Goodrich gets a third rig for Cotton Valley operations.
The key takeaway: Goodrich has solid reserves, and management owns a massive
56% of outstanding shares. So you can be sure that if you buy stock, they’re
on board with doing all they can to make your shares go higher.
Infinity (IFNY)
and PetroQuest Energy (PQ)
Insiders nibbled on $107,000 worth of shares at Infinity last year. Normally
that would not be enough to merit attention -- even at a tiny $85 million
market cap company like this. But two things make this company stand out.
First, insiders kept buying on the way up – from $3.24 in April to $6 per
share in early December. Second, this company comes recommended from a top
manager at another energy company. He’s familiar with Infinity’s prospects from a
distance, and he doesn’t hold a position in the stock, or the next one he
likes, mentioned below. Shares of Infinity, which produces oil and gas in
Wyoming, Texas and offshore Nicaragua, jumped to $8 from $6 in late December
and it looks like they will consolidate in the $7 to $8 range before moving
higher.
The same energy executive also likes the outlook for PetroQuest Energy,
which he says is still being unfairly penalized by the market for missed
expectations and subsequent management changes in recent years. PetroQuest
does exploration (in the Gulf of Mexico and along Gulf Coast of Louisiana)
-- so that makes it a riskier energy play.
But the company has prospects that are big compared to its current assets,
say analysts at Raymond James. Even a “modest” drilling success could drive
the stock up to their $7.50 price target, they believe. Insiders bought
about $390,000 worth of stock last May at $3.28. The stock recently traded
for $4.70. “We think investors can buy the stock for approximately the value
of the company’s existing proven reserves and get an option on exploration
upside for free,” says Raymond James analyst Wayne Andrews.
Bottom line: Unlike Chesapeake and Goodrich, these two are trading a lot
higher than the levels where insiders bought. But I like suggestions from
top executives at companies in the same field, especially when they are
confirmed by insider buying. That’s why these two still seem appealing
despite the price gains.
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 correspondent for this web site.
For more on Insiders Corner disclosure, see 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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