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Insiders Say the Rally’s Not Over for These Energy Stocks

By Michael Brush
Exclusively for InvestorIdeas.com
June 15, 2006

As momentum players continue to trash energy names in the rolling stock market carnage, insiders at several companies in the sector are stepping up to buy significant chunks of stock.

Given a choice of following flighty momentum players or the insiders, I’ll take the insiders any day. Indeed, there are good reasons to believe the bull market in energy isn’t over yet.

Interest rates are still low enough around the world to keep economies humming, even if the Fed continues to raise rates a few more times. This will support solid energy demand.
China isn’t slowing down yet – and this country is one of the bigger energy buyers.
Unfortunately, tensions in Iraq, Iran and elsewhere in the Middle East will continue to put a “terror premium” in the price of oil.
The price of natural gas in North America has pulled back, but inherent shortages remain. This means higher prices should return.

If you buy the case that energy prices will stay high, here are three micro-cap energy stocks you need to own, since insiders have been buying these stocks in the current market mayhem.

Teton Energy (TEC)

Teton Energy has production assets in the Rocky Mountains, including properties in the Piceance Basin and DJ Basin in Colorado, and the Williston Basin in North Dakota. About 80% of its production is natural gas.

Investors who buy Teton, which has a solid balance sheet, could see a double in a year. The brokerage AG Edwards has 12-month price target of $10 on the stock. It recently traded for $5.22.

AG Edwards breaks down the $10 expected stock price into three parts:

The present value of proven reserves plus cash is worth around $2 per share.
Teton’s 25% interest in a company called Piceance Gas Partners gives Teton 1,580 acres in Colorado’s Piceance Basin. The holding could have a net present value of $7 per share or more.
Teton’s Niobrara natural gas field holdings in the DJ Basin in Colorado could be worth $1-$2 per share.

Since the end of May, Teton stock has fallen to $5.22 from $7.30. On the way down, insiders purchased a quarter million dollars worth of stock at around $6.50. Remember, this is just a $77 million market cap company, so that level of buying is a significant signal.

What’s more, insiders cashed in over $600 million worth of options in May but did not sell the underlying stock. That’s often a positive sign. It could mean the insiders see a lot of potential upside, and they want to covert options to stock now to postpone taxes on imminent gains in the stock.

Abraxas Petroleum (ABP)

Despite its name, Abraxas Petroleum has a heavy emphasis on natural gas, just like Teton.

Abraxas Petroleum has operations in Wyoming, but most of its fields and potential wells are in Texas. The company’s strategy has been to buy old fields and develop them using modern technology.

As of the end of 2005, the company put the value of estimated proved reserves at $311.9 million. Abraxas has an enterprise value – debt plus market cap -- of $315 million. This means that if you buy shares now, you get the potential profits from unproven drilling projects for free.

Analysts at C.K. Cooper & Company like Abraxas because it has excellent profit margins. Abraxas should have margins of over 57% this year, compared to just 40% for a group of 15 similar, small exploration and production companies tracked by C.K. Cooper.

In the current market mayhem, Abraxas Petroleum stock has fallen to $4.30 from $6 in early May. On the way down insiders bought $110,000 worth of stock in late May for around $4.50 range. They’ve also been cashing in options without selling.

PHI (PHII)

Founded in 1949, PHI is one of the world’s largest commercial helicopter providers. PHI has about 170 helicopters serving the oil and gas industry. It has about 65 choppers that transport patients from accident scenes or between hospitals, in twelve states.

Last year, PHI got about 60% of its revenue from the oil and gas industry. In this space, PHI focuses on shuttling crews to deep water rigs run by companies like Royal Dutch Shell (RDS-B) and BP (BP) in the Gulf of Mexico.

Serving deep water rigs in the Gulf of Mexico offers several advantages.

Deep water production requires large amounts of capital, and the projects are long term. So they are less likely to be shelved if energy prices decline.
Thousands of people have to be moved around each day, as well as parts and equipment. Over two million passengers are transported in the Gulf of Mexico each year, according to the National Transportation Safety Board (NTSB). Crews can be made up of over 100 people, so helicopters have to make several trips a day.
The growth in the number of deepwater rigs should be strong. There are now 31 deepwater rigs in the Gulf of Mexico. But another 13 should be put in place by 2011, according to industry estimates.

PHI has an edge over competitors because of its solid safety record. Between 1995 and 2005, the company averaged 1.33 accidents for each 100,000 flight hours in the Gulf of Mexico according to the NTSB, compared to 2.29 per 100,000 flight hours for competitors.

Since early May, PHI shares have tumbled to $33 from $44. In late May, the company’s CEO Al A. Gonsoulin bought $568,000 worth of stock. It looks like he got a sweetheart deal since filings show he paid $31.04 on May 25 when the stock traded north of $36. Still, that’s a sizable purchase – especially for a tiny $94 million market cap company – so it counts.

The bottom line: Energy stocks have been crushed in the current market chaos, but energy prices should hold up. That makes these three stocks a buy right now.

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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