Overall, during the past week, corporate insiders traded a number of basic material stocks, including company CEO’s buying shares in Endeavour International Corp. (END) and Magellan Petroleum Corp. (MPET), and multiple corporate insiders selling shares in Flotek Industries Inc. (FTK). This report, part of our weekly coverage of insider trades by sector (based on last week’s SEC Forms 3, 4, and 5 filings), summarizes last week’s major insider filings in the basic materials sector (for a general discussion on how to interpret insider trades, please look at the end of this article):
Chesapeake Energy (CHK): CHK is an independent oil and gas company, with its primary operating assets in mid-continent region of OK, western AR, southwestern KS and the TX Panhandle. Insiders currently hold 22.7 million shares or 3.6% of outstanding shares, and last week Director Louis Simpson purchased 100,000 shares (for $2.7 million), increasing his stake in the company to 300,000 shares. This is a significant purchase, given that insiders bought only an additional 5,000 shares in the remaining twelve weeks of the last three months, and over the last year insiders bought a total of 304,047 shares; they sold 195,000 shares during the year.
Pacific Ethanol Inc. (PEIX): PEIX is engaged in the production, transportation, storage and sale of ethanol and wet distillers’ grain in the western U.S. Insiders currently hold 6.9 million shares or 11.9% of outstanding shares, and last week Director William Jones purchased 200,000 shares at 72c. This is on top of the two insiders buying a total of 125,000 shares that we reported last week in our review of the prior week’s insider filings in the alternative energy group. PEIX shares have been on a tear recently, rising almost 200% in less than a month, so the purchases by insiders at such premium prices is a sign of high confidence in the outlook for PEIX going forward. Earlier, we reviewed PEIX on October 27th and then again on November 2nd, starting when the stock traded in the 35c range, summarizing our thesis that PEIX had turned around and was going higher. The stock is up 150% since the time we wrote those articles. Overall, over the past year, corporate insiders have not sold any shares, and they have bought 0.50 million shares during that period.
Flotek Industries Inc. (FTK): FTK provides oilfield chemicals, artificial lift, and down-hole drilling and production equipment to the oil and gas industry. Insiders currently hold 3.4 million shares or 7.4% of outstanding shares, and last week four corporate insiders, including a President and three directors sold a total of 64,000 shares, all of which were regular sales (not part of any 10b5-1 plans). This is a big sell in terms of historical trends, as insiders only sold an additional 6,000 shares in the remaining twelve weeks of the last three months, and they sold a total of 154,500 shares during the past year; insiders did not buy any shares during the past year.
Williams Companies (WMB): WMB is engaged in the exploration, production, gathering, processing and transportation of natural gas mainly in the U.S. Insiders currently hold 2.2 million shares or 0.4% of outstanding shares, and last week three insiders exercised options and sold (regular sale) the resulting shares in 59,600 shares. This is a big sell in terms of historical trends, as insiders only sold no other shares during the last three months, and they also bought no additional shares during that period.
Consol Energy Inc. (CNX): CNX is a producer of bituminous coal and coal-bed methane gas primarily in the northern and central Appalachian and Illinois basins. Insiders currently hold 1.1 million shares or 0.5% of outstanding shares, and last week CEO Brett Harvey and President N J Deiuliis exercised options resulting in 122,940 shares, and sold (regular sale) 85,387 or the resulting shares. This is a big sell in terms of historical trends, as insiders only sold an additional 400 shares in the prior three years, and they did not buy any shares during the past year.
Calumet Specialty Product Partners (CLMT): CLMT is engaged in the production of hydrocarbon products in North America, processing crude oil into customized lubricating oils, solvents and waxes used in consumers, industrial and automotive products. Insiders currently hold 11.3 million shares or 34.4% of outstanding shares, and last week three insiders reported buying a total of 70,040 shares for $1.3 million. This included President & COO Jennifer Straumins (16,000 shares), Director Fred Fehsenfeld (50,000 shares) and Director George Morris (4,040 shares). This is a significant purchase in terms of historical trends, as insiders only bought an additional 75,500 shares in the prior year, and they did not sell any shares during that period.
Biofuel Energy Corp. (BIOF): BIOF is a holding company engaged in the production and sale of ethanol and distillers grain in NE and MN. Insiders currently hold 26.0 million shares or 25.1% of outstanding shares, and last week Cargill Biofuels Investments LLC, 10% beneficial owner of the company’s shares sold 1.1 million shares, ending the week with 11.4 million shares. During the last year, insiders have sold 5.3 million shares, and they bought no shares during that period. Cargill Biofuels Investments LLC is the equity investment vehicle for Cargill Inc., an agricultural, energy, and industrial conglomerate that is also America’s large private company.
Energy Transfer Equity LP (ETE): ETE owns a diversified portfolio of energy assets, including natural gas gathering and transportation pipelines, natural gas treating and processing assets, and three natural gas storage facilities. Insiders currently hold 45.2 million shares or 20.3% of outstanding shares, and last week two corporate insiders with more than 10% beneficial ownership of the company shares, Enterprise Products Operating LLC and Enterprise Products Partners LP sold a total of 339,925 shares for $12.7 million. This is a significant sale in terms of historical trends, as insiders only sold an additional 526,424 shared during the remainder twelve weeks of the prior three months, and they bought 250,952 shares during that period.
Endeavour International Corp. (END): END is engaged in acquisition, exploration and development of energy reserves primarily in the North Sea and the U.S. Insiders currently hold 27.3 million shares or 72.6% of outstanding shares, and last week three insiders reported buying a total of 77,500 shares. This included Chairman & CEO William Transier (30,000 shares), Vice Chairman John Seitz (40,000 shares) and CFO Michael Kirksey (7,500 shares). This is a significant purchase in terms of historical trends, as insiders only bought a total of 311,000 shares during the past year, and they sold no shares during that period.
Magellan Petroleum Corp. (MPET): MPET is engaged in the exploration, production and sale of oil and gas in Australia, U.S., Canada and the U.K. Insiders currently hold 15.6 million shares or 37.7% of outstanding shares, and last week CEO Thomas Wilson purchased 696,804 shares, increasing his stake in the company to 898,804 shares. This is a significant purchase, given that insiders bought only an additional 37,000 shares in the remaining 51 weeks of the past year, and they sold none during the year.
General Discussion on Insider Trading
The reports in this series identify last week’s insider trades of noteworthy significance by sector or industry group, either by virtue of their timing, their size, the number of insiders buying or selling, based on who is buying or selling, or by the trend of their buys and sales over the long-term. The rest of the series by sector and by week can be accessed from our author page.
What is Insider Trading?: Insider trading as defined here (and by the SEC) includes not just corporate insiders such as company executives and key employees, but also directors and large shareholders that have access to non-public information. Large shareholders are defined by the SEC for this purpose are those that having beneficial ownership of ten percent of more of the firm’s equity securities (including institutional investors). Also, in the U.S., “insiders” are not just limited to corporate officials and major shareholders, but also when a corporate insider “tips” a friend about material non-public information, the duty the corporate insider owes the company is now imputed to the friend who is now in violation of a duty to the company if he or she trades on the basis of that information. The U.S. is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.
While most insider trading is legal, the term is commonly used to refer to the illegal kind when a corporate insider trades based on material non-public information that can have an effect on the company’s share price. By law, insiders are prohibited from trading based on nonpublic information, but most believe that such trading does occur around the edges. The thinking goes that corporate insiders, because of their access, have the most up-to-date information on the health of their companies and the industries they operate in. Investors, as a result, can benefit from the timely knowledge of insider transactions. In fact, one University of Michigan study found that when executives bought shares in their own companies, the stocks tended to outperform the total market by 8.9% over the next 12 months. Conversely, when they sold shares, the stock underperformed by 5.4%.
Timeliness of Information: Like in the 13-D and 13-G filings for Institutions, the SEC Forms 3 and 4 on insider filings are extremely timely, and hence of greater significance, as they must be reported within two business days of the trade.
Insider Buying More Informative than Selling: As a rule, insider buys are more informative than sells. This is because insiders sell often, and they sell for a variety of reasons that may be completely unrelated to the health of the company, including, for example, to diversity their holdings or to pay for an upcoming personal expense. In contrast, insider buying is relatively uncommon, and since they have an exclusive window into their own company’s performance, it is reasonable to presume that they probably have good reasons based on information at their disposal when they are risking their own assets to buy company stock.
Regular and Automatic Trades: Insider trades maybe regular trades, or they may be automatic trades made under SEC Rule 10b5-1. It is generally believed that regular insider share purchases and sales carry more predictive value as they are made voluntarily by the insiders. Conversely, trades made under SEC Rule 10b5-1, called “Automatic Buys” and “Automatic Sells”, are part of a pre-determined plan or contract, and it is assumed that the plan was created before the insider had any privileged non-public information. Generally, almost all automatic trades are sells, not buys.
Furthermore, even automated trades made under 10b5-1 have some informative or predictive value due to loopholes in the rule that, for example, allow the insider to cancel the trading plan without any penalty or legal liability. So, the insider could set up a 10b5-1 trading plan before they have inside information (for example, from a quarterly report and guidance) while retaining the option to later cancel the plan based on the inside information. So, in effect, the execution of an automated trade also carries some predictive value as insiders retain the option under the existing rules to cancel their trades without penalty or legal liability.
Disclosure: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.