Going With What Works: Another Energy Stock With Solid Insider Buying 

By Michael Brush   
February 23, 2005

Small-cap energy companies whose insiders are snapping up shares have been an excellent place to pick up phenomenal returns. Since it usually pays to go with what’s working, let’s take a look at another one that looks like a buy because of recent insider activity: Tri-Valley (TIV).

Before we get to the details on this stock, which I think could triple or more in a year or two, let’s take on the skeptics who might make the following challenge. “Yes, energy stocks where insiders are buying have done well, but they’ve only gone up because energy overall has been a top performing sector this year.” 

They are right about the first part. But they’re wrong on the second, because small energy companies where insiders are buying have done way better than most other energy stocks. For some evidence, let’s look at the four energy stocks in my Jan. 14 Insider’s Corner column. (For Insider’s Corner headlines, click here: http://investorideas.com/insiderscorner/).  

Two of those stocks, Goodrich Petroleum (GDP) and Infinity (IFNY), are up an impressive 54% in the five weeks since that column ran. Another, PetroQuest Energy (PQUE) is up 43%. Even the worst performing stock from that column, Chesapeake Energy (CHK), has gained 22%. 
In other words, all of them have simply trounced the iShares S&P Global Energy Sector exchange traded fund (ICX), which advanced 14% in the same time frame.

Another great example: Parker Drilling (PKD), the very first stock I introduced in Insider’s Corner last Nov. 30. In the three months since then, it’s up 27%, compared to gains of just 7.9% for the iShares S&P Global Energy Sector exchange traded fund in the same time frame.

Now here’s a closer look at Tri-Valley, another one that should outpace the energy sector overall. 

Tri-Valley 

Tri-Valley is a Bakersfield, California-based energy company with a lots of moving parts, including a minerals division that will get spun out to shareholders at some point soon. But let’s just focus on what looks like the most interesting piece, the company’s natural gas fields in and around Bakersfield. 

Here’s the bottom line: A report last summer by Charles Strain and Associates, a reputable energy sector analyst, put the net asset value (NAV) of Tri-Valley’s Bakersfield projects at $47.46 per share. The stock recently traded at around $13. 

NAV is derived by discounting back the value of future production, to understand what the projects are worth in the present. The Charles Strain report uses conservative assumptions, including a $25 per barrel price of oil. Oil recently traded for twice that amount. Sure, mistakes and surprises can happen along the way. But basically it looks like Tri-Valley is still trading way below where it should be, despite the recent breakout from the $10 trading range for the stock. 

The Charles Strain report looks at what Tri-Valley might produce going down to depths of 12,000 feet in the Bakersfield area. But Tri-Valley says reserves actually reach down as far as 45,000 feet, and it may be possible to produce well into those depths. This isn’t clear, because structures are different in California than anywhere else where production has occurred so deep. “So this is pioneering effort,” says chief executive F. Lynn Blystone. “But if we are successful, we will in effect open up the third century of the oil business in California.” 

Recent insider activity suggests the valuation work by Charles Strain is on target and the stock will be moving higher. A Tri-Valley director purchased $208,000 worth of stock for $8.40 in early January, according to Thomson Financial. 

Directors also exercised 570,000 shares in options, at prices of 50 cents to $2.43 since early December. But more importantly, they did not sell the shares. What does this mean? It suggests they see much bigger gains ahead for the stock, and they wanted to realize the tax effect of exercising options now, before the stock gains play out. In short, it’s a bullish sign. 

Bottom line: I already own shares, but I’d buy more right now and hold for a triple in a year or two. 

At the time of publication, Michael Brush owned shares of Tri-Valley. 

Writer: Michael Brush 

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 correspondent for this web site.

For more on Insiders Corner disclosure, see 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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