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Three Hidden Ways to Play $100 Oil
By Michael Brush
Exclusively for InvestorIdeas.com
January 03, 2008
One of the best ways to play $100 oil right now might also be the least expected – through natural gas stocks.
True, natural gas prices and oil prices are thought to be disconnected. Natural gas prices are driven by “local” market forces in regions – like North America – while the price of oil is set by global supply-demand trends.
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But that linkage – or the lack of it – isn’t important. Instead, what matters is that oil-related plays have gotten all the attention in the energy space, thanks to “$100 oil,” leaving many natural gas plays behind. Given the inherent natural gas production declines in North America, however, companies with exposure to natural gas development there seem like compelling long-term plays.
Insiders seem to agree.
Three North American natural gas plays that have been lagging for much of the past year have seen robust insider buying lately. I’d favor these as energy plays, instead of chasing what everyone else is going for because of “$100 oil.”
Here is a closer look.
Goodrich Petroleum (GDP)
The company: Has promising assets in the Cotton Valley Trend in Texas and Louisiana.
The stock: Has declined to $23 recently from above $36 in the past year, partly because of a dilutive financing.
The insiders: They’ve purchased $7.8 million worth of stock in the past month, according to InsiderScore.com, which is really big for a company this size.
Goodrich Petroleum explores for and develops both oil and natural gas in the Cotton Valley Trend in Texas and Louisiana, but it is basically a natural gas play. The company has drilled over 200 wells in the Cotton Valley Trend, virtually all of them successful. It believes it has at least another 1,500 to go.
In mid-December, for example, Goodrich Petroleum announced success with two James Lime wells drilled in the Angelina River Trend in Texas. The company says it will start two additional James Lime wells in about a month. Expect results in late February or early March – a potential catalyst for the stock.
Continued successful drilling plus cost cutting add up to a discounted cash flow valuation on Goodrich Petroleum of $30 per share, according to Jefferies & Company analyst David Adams. If he’s right, that would mean 30% gains for anyone who buys here along with insiders.
Goodrich Petroleum just issued 5.8 million shares to raise funds, raising the share count by 20% in the process. Does this mean shareholders will be free of more dilutive financings for awhile? Probably.
Hercules Offshore (HERO)
The company: Operates rigs and repair boats primarily in the Gulf of Mexico.
The stock: Has fallen to $24 from above $36 in the past year and now looks dirt cheap.
The insiders: Have purchased $5 million in stock in the past month, and $4.4 million in the five months before that, according to InsiderScore.com.
Hercules Offshore provides jack-up rigs which help companies that drill for oil and gas offshore – primarily in the Gulf of Mexico. Again, this is basically a natural gas play.
Hercules Offshore seems poorly positioned as an operator in the Gulf of drilling market because of declining production there. What’s worse, its “ancient and inferior fleet” of jack-up rigs and boats makes it hard for the company to get business in more-profitable international exploration fields, according to analysts at Morningstar.
Bulls believe at least four factors could point to higher gains ahead, factors which could explain the heavy insider buying.
First, many oil service companies are moving rigs abroad from the Gulf of Mexico, which could drive up rates in the Gulf. Next, rigs around the globe are old and overworked – increasing demand for Hercules Offshore vessels used in repair work.
Third, the company does get a considerable amount of revenue from work abroad, and it may be able to transfer more rigs into more lucrative markets. Finally, the stock looks cheap. It trades for one times book value, compared to an industry average of over five times book value, according to Reuters.
Panhandle Oil and Gas (PHX)
The company: Holds primarily natural gas assets in Oklahoma, Arkansas and Texas.
The stock: Has fallen to $26 from $28 in late 2007.
The insiders: Have purchased $4.4 million in the past six months, including a round of buying in late December.
Panhandle Oil has oil and gas properties in the Fayetteville shale play in Arkansas, the Woodford and Caney shale in Oklahoma and the Woodford shale in Texas. Profits were hit recently by charges linked to declining production in some older operations.
But that doesn’t take away from the potential that lies in its Fayetteville and Woodford shale plays. For example, in early December a consulting firm hired by the company upped estimates of proved reserves by 22% -- but the stock still trades at the same levels as when the news was announced.
What’s key here for me as well is that Panhandle Oil is a large holding of Robotti & Company Advisors which has a long-term record of doing considerably better than the market in part because of a knack for finding promising but obscure, small companies. It’s also a personal holding of Robert Robotti – who was a big buyer at lower levels last year and who also serves as a director at the company.
The bottom line: Sometimes you can be too contrarian for you own good. But I think as an energy play, buying these three companies that insiders love makes more sense than chasing the oil-related plays everyone else wants because of the “$100 oil” buzz.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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