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Insiders Like Two Out of Favor Energy Services Companies
By Michael Brush
Exclusively for InvestorIdeas.com
September 27, 2007
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With oil prices near all time highs, energy production is booming. But that doesn’t mean trends are great for all energy services companies – the businesses that rent out equipment to the major oil producers and help them work their wells.
- Providing land rigs is a risky, since these kinds of rigs are fairly cheap to build compared to deep water rigs. This means new land rig supply can come on quickly and destroy pricing for companies that offer them.
- Natural gas fields in the Gulf of Mexico have been depleted after years of production. So offering jack up rigs in this market is not a great line of business, either.
Given these realities, it is no great surprise to see the stocks of companies exposed to these niches plummet 25% in recent weeks.
Shares of Basic Energy Services (BAS) - which offers land rig services in the U.S. -- tanked to $19 in early August from $28 in early June. They recovered recently to $22.
The shares of Hercules Offshore (HERO), which provides jack-up rigs and other services in the Gulf of Mexico, have fallen to under $27 from above $36 in June.
What is surprising about these two companies is the high level of insider buying at each one – given the supposedly bleak outlook for the two sectors they serve. Insiders at Basic Energy Services have purchased nearly $3.4 million worth of stock since mid-August for $20.25 to $22, according to InsiderScore.com, or prices around current levels. Insiders at Hercules Offshore bought early $2 million worth of stock for around $25 to $27 since early August. Again, their entry prices are around the current price for the stock.
Why are these insiders loading up on so much stock if things are supposedly so bleak for these companies? Let’s take them one by one.
Basic Energy Services
This company helps energy producers around the well site with well servicing, fluid services, drilling and completion services. It also offers well site construction. It has the third-largest fleet of well servicing rigs in the U.S. -- also known as “work over” rigs because they are used to “work over” a well when it is malfunctioning for some reason. It has 11% of the U.S. fleet. The company also offers fluid, drilling and completion services.
Revenue rose 21% t o $223 million in the second quarter, which sounds good. But net income dropped 11% and earnings per share fell 19%. The culprit was a lower utilization rate for it rigs – yep because new rigs came on the market. “We have seen more equipment in the market chasing the same fairly high level of activity,” chief executive Kenneth Huseman said in the company’s conference call.The company also blamed bad weather and a reluctance among some companies to produce energy, based on fears that natural gas prices might go lower.
However, costs remained high – the company would rather pay employees than lose them. So profits shrunk and the Basic Energy Services stock tanked.
But I think the market has over reacted, and insiders agree given all their buying. I’d cite three reasons to join them.
- I don’t believe natural gas prices will stay low forever, given the underlying production shortages in North America.
- Sure new rigs have arrived. But Huseman estimates half of them go to replace old ones, and the pressure hasn’t been so bad that Basic Energy Services has had to cut pricing. “We have not rolled back pricing nor are we feeling pressure to do so,” Huseman said during the call.
- Third, to get more energy out of wells, producers are injecting CO2, which reduces the viscosity of the trapped oil so it flows more easily. But it also corrodes tubes and well equipment more quickly, increasing demand for work overs provided by Basic Energy Services. “CO2 floods are a well servicing contractor’s friend,” says Huseman.
Hercules Offshore
This company has 33 jack up rigs and 65 “life boat” vessels which are used to carry out maintenance, construction and repair of jack up rigs in the Gulf of Mexico. It also has barge rigs, submersible rigs and land rigs.
Hercules Offshore saw earnings increase in the second quarter, but mainly because it gets about 30% of its revenue outside the Gulf of Mexico in regions around the world – like West Africa – where business is strong.
Things are not so great in the Gulf of Mexico. There is not enough demand to occupy the 71 jack up rigs in the Gulf. So why are Hercules Offshore insiders buying? I see at least two reasons.
- Management expects more rigs to leave the Gulf of Mexico, bringing supply down.
- Meanwhile Hercules Offshore hopes to land several jack up rig contracts with Pemex, the Mexican oil company which is under pressure to pick up production.
“We’re still very bullish here about our prospects as we move into 2008,” Hercules Offshore chief Randall Stilley said in the company’s most recent conference call.
The bottom line : Given the energy services niches these two companies serve, investors have some good reasons to be bearish on these two companies. But insiders disagree in a big way and they offer some good reasons to back up their conviction. So I would side with them.
Disclaimer
At the time of publication, Michael Brush was long Hercules Offshore. 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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