I wrote a column about three weeks ago speculating that oil prices and energy stocks were headed higher.
Man, talk about bad timing.
Since then, West Texas Intermediate
has fallen 9% to around $66 a barrel. The SPDR S&P Oil & Gas Exploration & Production exchange-traded fund
is down 4.5%. And many individual energy production companies are off even more.
I got the call wrong. It happens. But I humbly offer two points in my defense.
• First, none of the energy bears I checked in with at the time were making the case that Saudi Arabia would change policy and increase production — which is what has reversed oil prices. Still a victory for the bears, yes. And kudos to them. But they were right for the wrong reasons.
• Second, I’ve been bullish on energy and energy stocks here and in my stock newsletter since the dark days of 2015. Many have tripled or more since then. So despite the recent setbacks, the gains are still there.
Of course, that second point doesn’t help anyone who bought energy stocks for the first time three weeks ago, ahead of the steep declines. Like the rest of us, they’re wondering where oil and energy stocks go now, and what to do. I think these investors should average down now, and be patient. Here’s why.
I’m not sure I believe the conspiracy theorists who say that Saudi Arabia and Russia opened up the spigots at the behest of President Donald Trump who wanted to bring down gasoline prices ahead of the midterm elections. If this theory is correct, wow. Talk about foreign interference in our elections!
Trump sure is putting public pressure on the Organization of the Petroleum Exporting Countries. In a tweet Wednesday, he reiterated his stance:
Oil prices are too high, OPEC is at it again. Not good!
— Donald J. Trump (@realDonaldTrump) June 13, 2018
We’ll learn more about OPEC’s intentions when members meet on June 22. If the conspiracy theorists are right about the Trump effect — and their case is at least plausible — we can expect oil to drift sideways until the November elections.
In the background, though, several factors continue to put upward pressure on oil prices. And they aren’t going away.
• The future supply-demand imbalances are still there. Barring recession, which doesn’t seem to be on the horizon, global demand growth will continue. Supply growth could remain constrained by the chronic underinvestment in long-term projects by major oil companies over the past three years, and the newfound spending conservatism among U.S. producers.
• Geopolitical risk in and around oil producers remains elevated, in places like Libya and Nigeria, and in light of ongoing Saudi-Israel-Iran tensions.
• Saudi Arabia still needs high energy prices to support the domestic spending that buys domestic peace — and a planned initial public offering of its national oil company (which admittedly has been delayed).
• There’s a cap on how much Saudi Arabia can increase production since it is near its limit. In the background, global production naturally declines as wells run dry.
Insiders are buying
All of this may explain the most convincing evidence for energy stocks now. In the past few weeks, insiders at energy companies have been purchasing a lot of stock.
They’ve bought over $12 million worth of stock at a dozen companies. That may not seem like a lot. But it’s a big increase from zero. That’s about how much they were buying in the weeks and months ahead of the recent buying, which kicked in during late May as energy share prices plunged.
Insider buying doesn’t guarantee oil goes higher. And keep in mind that energy insiders — like most insiders — tend to be early to the trade.
But the insider buying does suggest that energy stocks are now oversold. And they could move higher from here even if oil stays roughly stable into the elections. The energy stocks that should do well from here include the ones that insiders were recently buying. Here is a quick guide to three of them.
Insider purchase: $8.8 million by CEO Harold Hamm at $65.30 on May 29
CEO and oil tycoon Harold Hamm moved years ago to snap up positions in the Bakken Shale Formation in Montana and North Dakota. He got some of the best acreage at great prices. Hamm’s early-mover advantage gives him break-even production when WTI is at $30 a barrel, says Morningstar analyst Dave Meats. That’s less than half of where it trades now. Continental Resources’ cost base is so cheap that the company has a consistently solid return on invested capital. All of this explains why Morningstar awards the company a “narrow moat” rating, which is unusual in a commodity space.
A key to successful investing is to look for signs that insiders are on your side. Hamm and his family hold more than 75% of the stock. This is clearly a strong signal that insiders here are on your side if you own this stock.
Cabot Oil & Gas
Insider purchase: $1.1 million by Director Robert Kelley, at $22.25 on May 29
Another big energy insider purchase has popped up at Cabot Oil & Gas
now down 20% from where it traded in January. A director with a good record bought quite a bit of stock.
Cabot is a bit like Continental Resources in that it was early to buy assets, so it got great deals. It was one of the first operators to move in to the Marcellus Shale in Pennsylvania, where it owns lots of acreage in Susquehanna County. It holds one of the lowest-cost positions in the Marcellus Shale, an energy play already notable for low production costs. Cabot’s production is at break-even when natural gas is at $2 per thousand cubic feet (MCF), says Morningstar analyst Jeffrey Stafford. It has recently been around $3 per MCF.
Cabot has about 3,000 undrilled locations, or well over a decade’s worth of drilling ahead. In late April, the company posted production growth above the high end of management guidance. Production was up sequentially despite the sale of Eagle Ford assets in February. Cabot is using some of the cash to buy back shares.
Ongoing improvements in infrastructure that gets natural gas out of the Marcellus will help Cabot win better prices going forward, as will the addition of power plants nearby.
Insider purchase: $205,800 by Director Pryor Blackwell at $15.36 on June 7
offers production services that help energy companies frack in the Permian basin. This is the sweet spot in U.S. energy production. Fracking is the go-to technique for producers, and the Permian basin, located in Texas and New Mexico, is one of the best locations.
ProPetro shares are down sharply for two reasons. One is the general rout in energy. The other is that the company recently did an offering that allowed Propetro investor Energy Capital Partners to sell a lot of stock. ProPetro got none of the money, but shareholders got hammered by the share weakness. No one likes these kinds of deals except the sellers.
Yet there are three reasons to buy the weakness. Oil prices should stay where they are or go higher. The insider buying is bullish. And ProPetro has a modern fleet of rigs capable of carrying out the latest techniques in fracking. Most of its fleet has been built since 2013.
Aside from these three names, there has been meaningful insider buying in the recent energy-sector weakness at Devon Energy
and a half-dozen other energy stocks I recently wrote up in my newsletter.
Michael Brush is a Manhattan-based financial writer. At the time of publication, he had no positions in any stocks mentioned in this column. He has suggested CLR, COG, PUMP, APA and REN in his stock newsletter Brush Up on Stocks.