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Pullback in Seismic Imaging Company Offers Good Entry
Point
By
Michael Brush
March 04, 2005
As an investor, being one with the crowd should make you feel nervous – not
comfortable. Right now the crowd loves few sectors as much as energy, which
should make you think twice about being in this group.
Sometimes, however, the crowd is right. And I think that’s the case with
energy stocks now. Sure, there will be pullbacks as oil inevitably dips. But
a look at the big picture shows that positive long-term trends are in place
-- for three reasons.
Global Economic Growth First, U.S. economic growth is solid, and the
Fed is probably wise enough to avoid destroying that by raising rates too
sharply. China and India continue to grow rapidly, too, contributing to
demand. To be sure, these two countries still only consume 8.8 million
barrels per day. That’s little compared to the 35 million barrels a day
wolfed down by the U.S. and Europe. But at current growth rates, India and
China together may be using more than 20 million barrels a day in 8 years,
say analysts at Ehrenkrantz King Nussbaum, a New York based brokerage. In
short, we are looking at a big shift in the balance between supply and
demand in the energy markets.
The Terror Premium Regrettably, global tensions along fault lines in
Iraq and the Middle East will continue. That will keep a “terror premium” in
the price of oil.
Strong Insider Buying Even though energy stocks keep moving up,
insiders keep buying them -- often in a big way. This is bullish. Insiders
at Chesapeake Energy (CHK),
for example, bought $6 million worth of shares at just over $21 on Feb. 25.
They plunked down $6 million despite an 18% rise in the stock since
mid-January when I featured it in an Insider’s Corner column (http://www.investorideas.com/insiderscorner/Articles/Four_Natural_Gas.asp),
and despite a 50% rise in the stock since last summer.
Input/Output
The bottom line: I’d stay bullish on energy names and buy them on pullbacks,
especially energy names where insiders are buying, too. Investors right now
can get both in one stock with Input/Output (IO), a company that does
seismic imaging of energy reservoirs for exploration and production.
Recently, there’s been a big pullback, and insiders are buying the pullback
in a big way.
First a little history. Insiders bought large amounts of Input/Output shares
in December 2003 at $3.50 right before the stock made an enormous move,
peaking at $11 last summer. So we know they are astute buyers.
Then the company missed earnings expectations and its stock fell below $7 in
November, January and February. Whenever the stock has slipped into the
$6.80 to $8 range, insiders have picked up big amounts.
Since November, they’ve purchased $3 million worth – a good sign the stock
is worth purchasing here in the $7 range. Why should you believe the
insiders? Because the long-term trends are in place to support demand for
its services and revenue growth will likely return.
“Oil prices aren’t going back down in the $20 range any time soon, and there
is going to be a lot more drilling activity,” says George Putnam who writes
the Boston-based Turnaround Letter, which has a buy recommendation on the
stock. “The majors have been slow to ramp up their exploration efforts
because in the past they have been burned when they did that too quickly
after oil prices rose,” says Putnam. But this time, he says, since oil
probably won’t retreat too much, exploration and production has to ramp up
soon.
That alone will create more demand for seismic imaging by Input/Output. But
because reserves are getting harder to find and energy prices are so high,
oil companies will go after reserves in tough environments like deep beneath
the water or deep underground. Since there is less room for error in these
settings because production is more costly, that should create even more
demand for seismic services.
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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