With all the talk of what the stock market may or may not to do, it is hard to keep your head down at times. Some really smart guys like Seth Klarman and David Tepper are warning about the disconnect between stock prices and the economy, while other smart guys, like Leon Cooperman and Bill Miller, are saying that we have room to run on the upside. Trying to decipher the very complex economic and geopolitical picture is way above my pay grade, and I suspect it is way above most other folks' heads as well. I confess that I spend time talking it all over with friends, but I avoid the temptation to derive firm conclusions about what the market may or may not do. I have found that to be very harmful to my net worth.
I find it interesting that smart-money opinions are converging with the "buy it if it is cheap" approach I favor in a very important sector. We have seen private-equity investors like Leon Black of Apollo (APO) and Henry Kravis of Kohlberg Kravis Roberts (KKR) talk about the opportunities in the oil and gas industry. At the same time, I have noticed cheap-stocks specialists like Donald Smith and Company, Michael Price and others increase their holdings of select energy-related stocks. Energy use is going to increase in the future and for the short part of the run, anyway, the demand will be met by fossil fuels, and many of those stocks are very cheap.
Outside investors are not the only ones who seem to think so. I have also noticed that insiders at many energy companies have been snapping up shares of their stocks in the past few weeks. Apparently they see the same bright future and cheap assets combination that the private equity and deep value investors see right now.
EP Energy (EPE) is an oil and gas exploration company that specializes in unconventional oil and gas assets in the U.S. The Houston-based company has assets in many of the leading shale fields including Eagle Ford, the Permian Basin and Haynesville. The company recently reported results that were ahead of expectation and raised their production outlook for the year. CEO Brent Smolik and CFO Dane Whitehead like what they see developing for the company and stock price, as they have both been buying stock in the open market recently.
Continental Resources (CLR) is one of the largest exploration development companies operating in the Bakken Shale. The North Dakota-based company owns more than 1 million acres in North Dakota and Montana. Its production in the region has risen more than tenfold in the last six years and CEO Harold Hamm recently told an investment conference that he expects this to continue increasing. He backed up his conviction with cash and recently purchased an additional $5.6 million worth of company shares.
Noble Corp. (NE) is in the drilling end of the energy business and a leader in the deepwater drilling part of the offshore industry. In addition to the prospect of improved conditions in the drilling industry, the stock is a solid dividend play as it yields 4.9%. CEO David Williams and CFO James MacLennan like the combination of growth prospects and income as they have both been buying stock in the open market recently.
Hercules Offshore (HERO) has been popping up on many of my value screens in recent weeks. The stock is currently trading at just 85% of book value and appears to be a solid bargain issue. The company operates shallow-water drilling rigs and has a fleet of liftboats that are used to carry equipment and supplies to offshore rigs. Director Steven Webster has bought 75,000 shares of the company in the past month, so he must be comfortable with the future prospects of the company.
I am not a very good macro forecaster, but I am really good at following the money. So far in 2014, a lot of the smart and patient money has been looking to accumulate shares of companies in the energy business. The people running these companies also seem to think that the future of the oil and gas business is bright. Insiders and smart outsiders both seem to think that a powerful macro trend is developing in this sector and it makes sense for patient investors to go along for the ride.