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Three Ways to Hedge Those High Prices at the Pump
By Michael Brush
Exclusively for InvestorIdeas.com
May 22, 2008
It’s not often that we see significant insider buying in a group that’s run as far and as long as energy has.
But in the past week I’ve spotted decent insider buying at three promising energy plays.
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One in particular, Sandridge Energy (SD), has such compelling buying it really stands out as a stock to own right now – despite worries in some quarters that we are in an energy bubble. I put it in the Chesapeake Energy (CHK) category in this regard – in part because there’s a cross-over in management.
And while these three technically aren’t direct plays on high gasoline prices, they’re all energy stocks -- so if you own them they could act as a natural hedge against price hikes at the pump. The more you pay at the pump, the more you are likely to make owning these stocks. Since these are natural gas and equipment plays and stocks are always volatile and risky, there won’t really be a 1-to-1 correlation, however.
Here’s a closer look.
Sandridge Energy (SD)
Over the past few days, insiders at this U.S.-based natural gas play have really opened up their wallets to buy shares. The buying is so notable, it’s well worth taking more than the usual amount of time to describe it, so bear with me.
First, Tom Ward, the chief executive, bought $11.2 million worth on May 19. He’s a great insider to follow for at least three reasons.
- He was a co-founder of Chesapeake Energy, which has had spectacular success finding and developing natural gas fields in Texas, Oklahoma, Arkansas and several other states. Chesapeake, which also looks like a buy based on insider purchases, has been one of the key developers of natural gas plays in the Barnett Shale and the Fayetteville Shale, and more recently the Haynesville Shale.
- Next, Ward has a great record for buying Chesapeake at the right time over the past five years. During 2003-2006, he made 17 purchases of a million dollars or more. The stock then advanced anywhere from 30% to 60% in the subsequent six months, according to Thomson Financial.
- Third, he put over $100 million into Sandridge Energy in early November 2007 when it began trading as a public company. The stock is now up over 80%. Talk about smart money. But now he is buying more -- $11.2 million worth.
That’s not the end of the bullish insider buying. Next, Daniel Jordon, a director, purchased over $2.7 million worth of Sandridge Energy at around current prices in the past few days. He also put $6 million into the stock back at the time it began trading last November – so he’s also up over 80% on that purchase, demonstrating a knack for knowing when to buy.
The fact that these two insiders have such good records – and that they are still plowing significant amounts of money into Sandridge Energy on a new offering – is a powerful endorsement for this company. So what are its strengths?
Sandridge Energy has significant holdings in what’s known as West Texas Overthrust, a natural gas-rich area where it has operated since 1986. The region includes the Piñon Field, and two other prospects called South Sabino and Big Canyon. The company also operates in the Cotton Valley Trend in East Texas, the Gulf of Mexico, Oklahoma and Colorado.
Sandridge Energy says it has about 4,600 potential drilling locations, including 2,600 in the West Texas Overthrust. The company owns and operates dozens of drilling rigs – which are in scarce supply given the energy boom. Sandridge also controls natural gas holdings that are rich in carbon dioxide, which is used to expedite oil recovery in the region.
Western Gas Partners (WES)
Recently formed by the energy company Anadarko (APC), Western Gas Partners is a limited partnership that owns the infrastructure needed to gather, treat, compress and transport natural gas. Anadarko has promised all the production from wells currently hooked up to Western Gas systems, along with production from any wells that are drilled nearby.
Everyone from chief executive Robert Gwin to several directors and the chairman bought $3.1 million worth of stock when it began trading in an initial public offering on May 14.
I wouldn’t look for tremendous upside from this infrastructure play. As a pipeline company and natural gas transporter, it’s kind of toll taker – not the kind of company who’s stock is likely to rocket because of a new discovery.
However, as a toll taker and a limited partnership, it can offer steady and fairly predictable income. It doesn’t have exposure to price swings in the commodity. And because of the way they are structured, limited partnerships offer many investors some protection from taxes on distributions.
Geokinetics (GOK)
Geokinetics provides seismic data services in North America, Central and South America, Africa, the Middle East, Australia, New Zealand and the Far East. Now that oil and gas prices are so high, energy companies are willing to pay more for seismic data to figure out how to produce energy in areas once considered too difficult a challenge.
A director, Gary Pittman, just bought $113,000 worth of the stock. The CEO Richard Miles and Pittman also bought $212,000 worth back in March at around $17.50, or about $2 below current levels.
The bottom line: With these three plays, insiders are showing you the way to make some money off the energy boom that is costing you so much at the pump.
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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