Oil Insiders Are Buying Their Own Company’s Stock

By Eric Fry
Contributor

Oil & Gas

A funny thing is happening in the oil patch… Company insiders are buying up their own stock. Apparently, they’re expecting good times ahead.

Generally speaking, insider buying sends a more reliable signal of future stock trends than insider selling.

Insiders might sell their stock for any one of a number of reasons. They could be raising cash to pay for a second vacation home, a third Ferrari or a fourth wedding.

Buy when insiders buy their own stock, they do so for one reason and one reason only: They believe their stock is going to go higher.

That said, some insiders buys are more significant than others. For example, some insider buys take place when company officers exercise the call options they received as part of their compensation package.

When these options-based buys take place, insiders often sell their stock coincident with exercising their options… or shortly thereafter. These purchases are more like taking the stock out for a spin rather than actually investing in it.

Therefore, the insider buys that send the strongest signal of confidence in the company are the ones called “open market buys.” In these cases, insiders reach into their own pockets and pull out their after-tax dollars to buy their own stock.

They could use those dollars to make any investment they wished. And yet, the one they choose to make is in their own company.

That’s a strong vote of confidence… And that’s the exact vote of confidence many insiders in the energy sector have been making recently.

Here are a few notable insider buys from the last few months…

  • One month ago, Bryan Sheffield, founder and CEO of Parsley Energy (NYSE: PE), scooped up $5 million worth of his company’s stock. This was Sheffield’s first-ever open market purchase.
  • During the last 30 days, Harold Hamm, founder and CEO of Continental Resources (NYSE: CLR), purchased nearly $8 million worth of his company’s stock. Hamm had not purchased any of his stock on the open market since 2015.
  • Three weeks ago, Prady Iyyanki, president and CEO of Forum Energy Technologies (NYSE: FET), purchased $1 million of his company’s stock.
  • Late last year, two insiders at Noble Energy (NYSE: NBL) picked up a total of $1.2 million worth of company stock.
  • Also late last year, the CEO, CFO and three other insiders at Green Plains Inc. (Nasdaq: GPRE) made purchases of company stock totaling more than $2.5 million.

Obviously, insider buys like these are not foolproof indicators that the price of a particular stock is about to move higher. But all else being equal, insider buys are a more promising sign than insider sales… especially when one or more of the insiders has established a track record of buying at opportune moments.

Such is the case with U.S. Silica Holdings’ (NYSE: SLCA) William J. Kacal, a board member of the company for the last six years. During that tenure, Kacal has spent about $1 million of his own money to pick up 52,400 shares of stock.

As you can see in the chart below, Kacal made all of his purchases near low points, shortly before the stock began trading higher.

Source: Bloomberg

Interestingly, his largest purchase was the most recent one. On February 26, he spent more than half a million dollars to buy 20,300 shares of stock.

To reiterate, this recent purchase is not a certain sign that prosperity is on the rise at U.S. Silica, but it is a promising sign nonetheless.

And Kacal is not the only insider to pick up stock recently. Three other insiders have purchased stock during the last three months. As a group, the insiders at U.S. Silica have established an impressive track record of timing their buys and sells.

The chart below shows the 12-month net total of insider buying or selling. When the red line rose from 2013 to 2014, the 12-month total value of stock sold by insiders soared from zero to more than $8 million.

Then the selling activity gradually declined over the next two years until early 2016, when insiders started scooping up stock again. That insider buying continued for several months. But as the stock price soared throughout 2016, insiders started selling stock once again.

Whenever the red line breaches into the zone at the bottom, it’s an indication that net insider buying is occurring. As you can see, a new period of insider buying appears to be underway…

Source: Bloomberg

These insider buys at U.S. Silica and elsewhere in the oil sector seem to fly in the face of the widespread belief that oil prices will remain rangebound for the next several months, if not slide a bit lower.

According to a recent Reuters survey of 37 economists and analysts, the price of Brent crude will average about $63 a barrel this year. That predicted price level is nearly $5 below the current price of Brent.

Clearly, expectations are not running high for the oil price. At least not among the ranks of economists and analysts.

But oil company insiders seem to hold a more optimistic outlook… and they are investing their own dollars in that outlook.

Good investing,

Eric