Contango CEO Is Bulking Up

 | Oct 03, 2012 | 1:00 PM EDT
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It's important to keep an eye on what company insiders are buying, and if we take a look at Contango Oil & Gas (MCF), we see president and acting CEO John Juneau picked up about 46,000 shares of the company between Sept. 27 and Oct. 1. This has upped Juneau's holdings significantly, to 55,000 shares, at general purchase prices of between $49 and $50. (The largest lot was at an average price of $49.66.)

Contango is an oil-and-gas exploration-and-production company, with natural gas constituting most of its production and reserves. It operates primarily in the Gulf of Mexico, with some onshore acreage. The company has market capitalization of about $750 million, but average daily share volume over the last three months has been about 80,000, and its current stock price has been about $49. That share price is toward the bottom of its 52-week range, as the stock has dropped 14% over the past year.

So it might behoove retail investors to take a small position here -- because, in theory, insider trading is associated with superior returns. After all, these insiders are already exposed to the company's fortunes -- so they would have to be highly confident in the business to bulk up on more of these shares, instead of the normally preferred route of diversifying their investments.

Contango's fiscal year ended in June 2012, and according to the company's 10-K filing with the SEC, revenue sank 11% from the previous fiscal year. Volumes were only down 3%, but lower natural gas prices made up for rising oil prices, and drove revenue down further. The average sales price of natural gas for the year came in at $3.10 per thousand cubic feet. While we don't particularly like exposure to commodity prices, we expect strong demand for natural gas in the coming years as it continues to replace coal as a source of U.S. electricity. The only question is whether onshore natural gas production will increase enough to hold prices steady.

That aside, Contango also managed to cut its costs, and EPS for the year were $3.79, vs. $4.14 in the prior fiscal year. Contango trades at 13x trailing earnings. Wall Street doesn't follow the stock closely enough for it to have a sell-side EPS projection for next year, but we see it boiling down to natural gas prices: If they are flat, earnings should be about flat, and so on. Juneau's insider trading signals that the  CEO at least sees a potential recovery in prices, and that would feed directly into Contango's bottom line.

We think Contango can be compared with other oil-and-gas companies with large offshore interests, such as BP (BP) and now Plains Exploration & Production (PXP), which recently purchased some of BP's offshore assets. BP is cheap, at only 8x trailing earnings, but the industry as a whole is trending toward low multiples, and BP in particular is continuing to deal with the fallout from the Deepwater Horizon spill. BP does offer a 4.5% dividend yield, which could be attractive to investors seeking a combination of value and income, and who are not worried about the exposure to oil prices.

Plans, a $4.8 billion market-cap company, had been growing its revenue and earnings, and it currently trades at 15x forward estimates as it evolves to become a deepwater-focused player in the energy space. But, as we mention in our discussion, investors should probably wait for further natural gas acreage sales before they consider it for an investment.

For another company exposed to natural gas prices, investors may also want to consider onshore natural gas-focused companies Chesapeake (CHK) and Newfield Exploration (NFX). An increase in natural gas prices -- bullish for Contango -- would also benefit these companies. Chesapeake is experiencing corporate and management issues, but recent insider buying and a forward-earnings multiple of 15x -- as well as its strong position in booming natural gas plays -- make for an intriguing investment case. Newfield is cheap, at a market cap of $4.2 billion and forward price-to-earnings ratio of 10x, though its earnings sank 38% last quarter from the prior year.

Contango stacks up well with its peers on a value basis. Only BP is clearly cheaper, and there are other issues embedded in that particular name. Newfield, and possibly Cheapeake, are about even with the company in terms of forward-earnings multiples, but any rise in natural gas prices should benefit all three. With Contango seeing more than $2 million in insider buying, to us it is currently the most attractive stock.

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