BLOOMBERG

Energy Insiders See ‘Fire Sale,’ Buy Most Shares Since 2012


By Lu Wang and Oliver Renick - Dec 8, 2014


The rout in energy stocks reminds Tim Rochford of something else he’s seen in Texas.
“What happened is almost like a herd of cattle, one cow turns left, all the cows follow it and it’s
a stampede,” said the 68-year-old co-founder of Midland-based Ring Energy Inc., one of 118
industry executives who bought shares of their own companies in the last month amid the worst
losses since 2008.


“This is an absolute fire sale,” he said. “It’s an overreaction and the result is it’s oversold.”


With valuations at a decade low, oil executives such as Rochford and Chesapeake Energy
Corp.’s Archie Dunham are driving the biggest wave of insider buying since 2012, data compiled
by the Washington Service and Bloomberg show. They’re snapping up stocks after more than
$300 billion was erased from share values as crude slipped below $70 for the first time since
2010.


Rochford and two other board members, Stanley McCabe and David Fowler, bought a total of
more than 30,000 Ring shares over the past month, regulatory filings show. While the stock has
lost 55 percent from its June peak, Rochford said his company can stay profitable even should oil
slip to $50. Crude prices fell 4.2 percent today to $63.05 a barrel and compared with around
$105 five months ago.


As oil continued its selloff, energy shares tumbled 3.9 percent at 4 p.m. in New York, dragging
the Standard & Poor’s 500 Index down 0.7 percent. Equities in the industry are being ejected
from the U.S. bull market, falling 13 percent this year, while the S&P 500 climbed 11 percent.
Oil is down 36 percent amid concern over a glut of supply.


Price War
The Organization of Petroleum Exporting Countries last month kept its production ceiling
unchanged, underscoring the price war in the crude market and challenge to U.S. shale drillers
that have lifted output to a three-decade high.


Sinking oil is deepening concern that companies such as Halcon Resources Corp. (HK) and
Goodrich Petroleum Corp. will struggle to fund obligations as revenue slumps. Veterans like
Dunham said they’ve seen it all before.


“Most of these execs that are buying have been in the industry as long as I have, so they know
how supply and demand works and they’re buying quality stocks,” Dunham, the chairman of
Chesapeake Energy (CHK) who is turning 76 this month, said by phone. He recently purchased
500,000 shares of the Oklahoma City-based shale producer, his biggest since joining the
company’s board in 2012, according to regulatory filings compiled by InsiderInsights.com.


“I’m very optimistic medium and long-term that the industry will persevere through another one
of these cycles,” said Dunham, the former chairman of Houston-based ConocoPhillips. “It’s just
a matter of time to get supply balanced with demand.”


Lone Loser

The number of insiders buying has increased 64 percent from a year ago and more than doubled
from the average during the first 10 months of 2014, according to data compiled by Bloomberg
and Bethesda, Maryland-based Washington Service.


Buying is picking up after share losses worsened. The S&P 500 Energy Index tumbled 8.9
percent in November, falling for a third straight month and extending the decline from its June
peak to 21 percent.


The industry gauge is the only group in the S&P 500 to retreat in 2014, trailing the benchmark
gauge by 24 percentage points, the most since 1998. At 1.76 times book value, the stocks trade at
a 37 percent discount to the market, the biggest since 2000.


Trouble, Opportunity
Loews Corp., which owns about half of Diamond Offshore Drilling Inc., bought 1.18 million of
the unit’s shares in November. Last week, Loews made another purchase of about 410,000
shares.


James Tisch, the chief executive officer of Loews, said the industry slump will allow Diamond
Offshore to expand assets at a cheaper price.


“Trouble is opportunity,” Tisch, 61, said in a Nov. 3 conference call held by New York-based
Loews. “It will not surprise me to see some of our competitors get into financial trouble, where
they are put into a position, or their lenders are put into a position, that they have to sell rigs,” he
said. “Hopefully, Diamond will have occasion to grow its fleet by purchasing rigs at a discount.”


Earnings in the industry will drop 15 percent in the fourth quarter and fall 9.8 percent in 2015,
the worst among 10 S&P 500 groups, analyst estimates compiled by Bloomberg show.


Oil Projections

Shares of oil exploration and production companies imply a long-term crude price of $75 a
barrel, according to Goldman Sachs Group Inc., which uses a model that takes into account how
varied oil prices affect future income and cash flows.


OPEC’s decision not to try and eliminate an oil-supply glut means the crash won’t stop until
prices reach $60 a barrel, according to firms including Nomura Holdings Inc. and Deutsche Bank
AG.


For smaller firms and those that have ratcheted up borrowings during the commodity boom,
falling oil will make it harder for them to make profits and meet their obligations, according to
Shawn Reynolds, a portfolio manager at Van Eck Associates Corp. in New York.


“When you get down to these price levels, the difference between winners and losers becomes
more exacerbated,” Reynolds said by phone. Van Eck oversees $30 billion. “The really good
guys will continue to grow production and net asset value, whereas the guys that are on the
fringe and need $90 to $100 oil, they’re not going to be able to grow, invest, and they’ll be
lagging.”


Costliest Shale
Halcon and Goodrich are among about 21 borrowers operating in the costliest U.S. shaleproducing
regions that will be unprofitable if crude oil falls below $60 a barrel, according to data
compiled by Bloomberg.


The Russell 2000 Energy Index, which tracks smaller companies in the industry, has plunged 40
percent this year. Halcon and Goodrich, whose debt amounts to at least half of their total assets,
are among the worst performers, sinking more than 54 percent.


Executives from those companies are buyers as well. Charles Cusack III, chief operating officer
at Halcon, made two purchases last month adding a total of 70,000 shares, regulatory filings
show. Michael Perdue, a board director for Goodrich, bought about 17,000 shares on Nov. 6.


Scott Zuehlke, spokesman for Halcon, and Daniel Jenkins for Goodrich, didn’t respond to phone
messages seeking comment.


Sellers Retreat
Bulls are emerging as bears retreat. The number of executives selling stock fell to 106 last
month, down from a peak of 214 in June.


Last time executives were more optimistic than now, in November 2012, the S&P 500 Energy
Index was at the end of a decline where the shares dropped as much as 10 percent over two
months. The measure rebounded in three of the next four months, rising an average 2.5 percent.


“You can sell your shares for any number of reasons, but you only buy for one reason: because
you think your stock is undervalued,” Terry Morris, a senior equity manager who helps oversee
about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in
a phone interview.


“The whole group has been the doormat of the market,” Morris said. “It’s a good sign if insiders
are starting to step up and buy. They know more than you and I combined.”


To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Oliver
Renick in New York at orenick2@bloomberg.net


To contact the editors responsible for this story: Jeff Sutherland at jsutherlan13@bloomberg.net;
Chris Nagi at chrisnagi@bloomberg.net


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