- The energy sector continues to be an overweight allocation in my portfolio for a variety of reasons outlined below.
- Two of my core holdings have had significant insider buying recently.
- Both of these energy concerns are transforming their business models and are reasonably valued. They work well for long-term investors.
One of my routines during the weekend is perusing the top 20 insider buy list in the industry weekly Barron's. Unfortunately, I was sick most of the weekend and am just getting around to this weekly task. It was nice to see two of my core energy holdings on the list this week.
I continue to be overweight the energy sector as the area is showing reasonable valuations, oil remains stubbornly above $100/barrel, natural gas prices are up substantially from where they were a year ago and we are still in the early innings of a continuing domestic energy boom.
Chesapeake Energy Corporation (NYSE:CHK) is the second-largest producer of natural gas and the 10th largest producer of oil and natural gas liquids in the U.S. The company also owns substantial marketing, compression and oilfield services businesses.
Two insiders bought over $1.6mm over the past five weeks. This follows up with other insider purchases late last year. Noted value investor and activist Carl Icahn also has a ~10% stake. Chesapeake Energy has gotten religion on cutting costs recently. The company cut capital spending in half in 2013 to $7.2B from $14.1B the previous year with plans to trim another 20% in 2014.
Despite the cut in capital spending, revenues should increase in the range of 7% to 9% over the next two fiscal years. Earnings should get a boost of ~25% this year according to current consensus estimates. The shares go for roughly four times operating cash flow.
Occidental Petroleum (NYSE:OXY) continues to be one of my favorite holdings among the mid-majors. It is selling off overseas assets as well as operations in overregulated states (AKA, California) to focus on growing production in fast growing domestic shale regions such as in the Permian.
A director bought almost $500K in new shares last week. This follows other insiders making significant buys in December. The company recently announced a 12.5% dividend boost and now yields 3%. It also added 30mm shares to a robust stock repurchase plan.
The median price target by the 20 analysts that cover the shares is $106 a share. The company was named one of Cowen's favorite big oil plays in February. The energy concern is in the process of selling 40% of its Middle Eastern operations in a deal that could fetch ~$8B. This should be the next major catalyst for the stock when it occurs even as it is a complicated process due to geopolitical factors.
I am happy to see two of my core energy holdings being bought up by insiders. It is one of the key reasons I will continue to add to these positions on any significant dip in the overall market.
Disclosure: I am long CHK, OXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.