I use insider buying as a starting point to find promising names, and this seems to work particularly well with energy companies, observes Michael Brush, editor of Brush Up on Stocks.
But what’s really odd about the energy sector now is that insiders keep buying shares of their companies, even though the sector was up over 62% in 2022. What’s going on? Two factors explain this.
First, oil will trade up 16% on average next year and spike up over 25%, says Francisco Blanch, the Bank of America head of global commodities and derivatives research. This would be bullish for energy stocks.
Second, energy stocks are still arguably cheap. Large cap exploration and production companies trade at 3.7 times EBITDA. Historically they traded between four and six times, says Ben Cook, who manages the Hennessy Energy Transition Investor Fund (HNRGX).
Energy stocks make up 5% of the S&P 500. That’s well below the 8% average over the past ten years. This suggests more money can flow into the space, driving energy stocks higher.
Some of the biggest insider buying is happening in the limited partnership below. It’s a play on the war in Ukraine, since it will be supplying natural gas to Europe at some point, displacing European dependance on Russia.
Energy Transfer LP (ET) has a distribution yield of 8.5% and a market cap of $38.7 billion. This midstream energy transport limited partnership benefits from increased natural gas demand in the U.S. and abroad. It made a big acquisition in the third quarter of 2022 which built out its energy transport network and contributed to the 59% gain in net income to $1 billion.
It also benefits from rising energy prices in the U.S. since this means it can charge more for the use of its pipelines. It also offers a nice distribution yield, for income investors.
Energy Transport has a Lake Charles liquid natural gas (LNG) plant in the works that may get cleared to go for construction during the first several months of 2023. This will make Energy Transfer a play on the huge discrepancy between natural gas prices in the U.S. and LNG prices in Europe and Asia. The company has already signed six long-term sale and purchase agreements.
Board chair Kelcy Warren bought $73 million worth up to $12.39 in the last several months of 2023. The insider here is worth following for two reasons. First, Warren has been in the energy business for around four decades, and he made over $1 billion in the space. He knows the sector well.
Second, he is the co-founder of Energy Transfer. Academic studies show that founder-run companies often outperform. In my experience, founder purchases of their own companies are a particularly good signal.
