Insiders made noteworthy buys (see definition below) in six energy stocks this past week (June 4th to 8th, 2012), and sold one other. These, along with insider buys and sells last week in other sectors and groups (discussed in a prior article on the basic materials sector) were selected based on a review of over 1,600 separate SEC Form 4 (insider trading) filings last week, as part of our daily and weekly coverage of insider trades.
The filings are noteworthy based on the dollar amount sold, the number of insiders buying or selling, and based on whether the overall buying or selling represents a strong pick-up based on historical buying and selling in the stock (for more info on how to interpret insider trades, please refer to the end of this article):
McDermott International Inc. (MDR): MDR is a provider of engineering, procurement, construction and installation services to offshore oil and gas field projects. On Wednesday, four insiders filed SEC Forms 4 purchased 277,368 shares for $2.6 million, the only insider purchases at least in the past two years. The largest buyers included CEO Stephen Johnson (102,368 shares) and Director John Bookout (150,000 shares).
MDR shares currently trade near multi-year lows, down slightly YTD, but off by more than 80% from the highs in mid-2008, as the European fiscal crisis and overall weakness in the global economy have taken a toll on demand for oil and oil prices, and the profitability at many energy companies. In its most recent Q1 (March) reported four weeks ago, the company missed on revenues but beat analyst earnings estimates by a wide margin (25c v/s 15c). Also, the company announced a record backlog of $5.8 billion, up from $3.9 billion at year-end, and also well above the $4.8 billion reported at the end of the prior year's Q1. The shares reacted positively to the report, gapping up strongly the following morning, but then sliding back down in concert with the market and the weakness in energy stocks in May.
The shares currently trade at 9 forward P/E and 1.4 P/B compared to averages of 10.8 and 2.3 for its peers in the oilfield machinery and equipment group, while earnings are projected to rise at a strong 36.4% annual rate from 64c in 2011 to $1.19 in 2013. The stock was recently upgraded by two brokers, with energy investment boutique Howard Weil commenting earlier in May that at sub-$10 prices (close to where it trades now), the company trades at asset values, at price levels that they expect will hold even in the event of a pronounced industry contraction. Overall, of the 19 analysts that cover the company, 14 rate it at buy/strong buy, three at hold, and the remaining two at underperform, with a mean price target of over $16, well above current prices in the $10 range.
In addition to MDR, insiders also reported noteworthy buys this past week in the following five other energy stocks:
- Hercules Offshore (HERO), which provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry worldwide, in which President Claus Feyling filed SEC Form 4 indicating that he purchased 25,000 shares for $79,800, increasing his holdings to 120,612 shares, and in comparison to a total of 157,000 shares purchased in the past two years. Also, last week, we reported that two insiders purchased 40,000 shares in the company for $0.14 million.
- Magnum Hunter Resources (MHR), an independent oil and gas company engaged in the acquisition, drilling and production of oil and natural gas properties in the U.S., primarily in WV, ND, TX and LA, in which Director Stephen Hurley filed SEC Form 4 indicating that he purchased 10,000 shares for $37,100, increasing his holdings to 26,683 shares, and in comparison to 46,120 shares purchased by insiders in the past year. Also, last week, another Director purchased 2,020 shares.
- Phillips 66 (PSX), an independent downstream energy company, engaged in the refining and marketing of oil and gas, and also in power generation, lubricants and other specialty products businesses, in which Director Marna Whittington filed SEC Form 4 indicating that she purchased 2,500 shares for $74,765, increasing her holdings to 6,077 shares, and the first insider purchase since the company's IPO five weeks ago;
- Rowan Co. Inc. (RDC), which is a provider of offshore contract drilling services to the oil and natural gas industry, both domestic and international, in which Director John Quicke filed SEC Form 4 indicating that he purchased 1,000 shares for $29,366, ending with 2,000 shares after the purchase, and the only insider purchase at least in the past two years; and
- Sandridge Energy (SD), an Oklahoma-based independent oil and natural gas company, in which Director Roy Oliver filed SEC Form 4 indicating that he purchased 50,000 shares for $0.29 million, ending with 1.45 million shares in direct and indirect holdings after the purchase, and in comparison to 0.24 million shares purchased by insiders in the past year.
On top of these, insiders also reported noteworthy selling this past week in Clean Energy Fuels Corp. (CLNE), founded by famed energy investor and hedge fund manager Boone Pickens, that provides natural gas as an alternative fuel to vehicle fleets in the U.S. and Canada, in which two insiders filed SEC Forms 4 indicating that they sold 77,200 shares for $1.0 million, in comparison to insiders selling 0.42 million shares in the past six months.
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 10% or 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 non-public 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 may be 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.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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