We are seeing a little bounce in crude oil and oil-related stocks in the past couple of days, and the movement in some of the stocks has been pretty impressive. In spite of the nice bounce, most of them are still down big over the past year, and they may be bargains at this level. There is still a lot of speculation about what oil and oil stocks will do going forward. Although my views are closer to T. Boone Pickens' optimistic assessment than some of the $40-oil bears, I have learned over the years that my grand macro thoughts are more likely to lose me money that turn a profit.
What I have found to be wildly profitable is following corporate insiders when they make larger purchases of stock in their company when the price is falling. Insiders tend to have a much longer timeframe than most investors, and they are also more willing to catch a falling knife. Insider buying is not a precise timing indicator, but it is more reflective of a view that the stock will be a lot higher several years from now. That is pretty much in line with my view of markets, and following large insider buys has worked out pretty well for me. Right now, we are seeing insider buying over the oil patch.
WPX Energy (WPX) has been one of my favorite oil and gas companies for some time now. I confess that I have roundtripped the stock form a solid gain in a few months to a loss as oil prices plunged. The company has 1.6 million leased acres in Colorado, New Mexico, North Dakota, Pennsylvania, Wyoming, Argentina, and Colombia. The mix is mostly natural gas but the company has been focusing on what has been the profitable natural gas liquids business in 2014.
WPX has shed some assets, as it has sold its interest in Argentina for $294 million and announced the sale of the Marcellus shale operation for $300 million. This cash should put it in a good position to weather the storm in crude oil prices. After the bounce this week, the stock is still down almost 50% in the past six months, and now trades for just 60% of tangible book value. Insiders think that price has fallen too far as five, including the CEO, have stepped up to buy 60,000 shares of WPX energy in December. I am in complete agreement with them, and I doubled down on my position in the stock.
I also followed the insiders in purchasing shares of Tidewater (TDW), the offshore marine services provider. The company supplies oil rigs, assists with pipe and cable laying, provides offshore construction and other forms of marine support to the oil and gas industry. Tidewater has 294 vessels and 6 remotely operated vehicles in its fleet, and has operations worldwide. The stock has declined more than 45% in 2014, and now trades at just 60% of book value. The company is profitable and pays a dividend of 3.24%, Insiders think the stock has fallen far enough and five of them, including both the CEO and CFO, have been buying stock in the open market this month.
Shares of Chesapeake Energy (CHK) have not fallen as far as Tidewater and WPX Energy, but the 26% decline in 2014 has attracted buying interest from the people running the company. Chesapeake has interests in approximately 46,800 natural gas and oil wells with proven reserves of 2.678 billion barrels of oil equivalent, so it is a major player in the U.S. energy markets and is very sensitive to oil prices. Insiders think that the price has fallen far enough, as two of them have bought stock this month and in November. At one point, 500,000 shares of Chesapeake Energy were bought. The stock is trading at 90% of book value, and the insiders seem to think that this level represents a bargain price.
I have no idea where oil prices are going, in the weeks and months ahead. All the comments coming out of OPEC oil ministers seem to indicate that something on the order of $60 to $65 is going to be the norm, as we go into 2015. In the long term, the price should move higher. The people running many of the oil and gas companies seem to think that the market is grossly undervaluing their assets and earning power, and they are stepping up to the plate with cash in hand to buy stock.
While there is no doubt in my mind that this will be a long bumpy ride, I think long-term asset oriented investors should consider joining them.