Given the strength of energy stocks for the past two years, it’s no wonder companies in the sector are rushing to come public and take full advantage of the exuberance.
That’s the cynic’s view, and there may be something to that.
But a savvy investor watches the energy sector initial public offerings (IPO) to spot the ones where insiders are buying the most, and considers going along with them to profit from further strength in the group, instead of giving in to cynicism.
We saw a great example of insider buying at an energy sector IPO recently at Complete Production Services (CPX), a Houston, TX-based energy field services company.
Of course, you have to believe that energy prices will stay firm to follow insiders here. I believe energy prices will stay high -- as I am in the camp that says demand from India and China and solid overall global growth will continue to support energy prices.
Another factor is the unease and political risk in several energy producing countries like Nigeria, Venezuela and the Middle East itself (http://moneycentral.msn.com/content/P71425.asp). Unfortunately, the price of oil includes a several dollar “terror premium” that probably isn’t going away any time soon.
If you agree that high energy prices are here to stay for awhile, then you might do well to join insiders in buying shares of Complete Production Services.
The Full Monty
This energy field services company came public on April 21 just below $27.50. Within a few days, insiders registered $4.5 million worth of purchases at $24. Ok, they got a great deal, since the stock has never actually traded as low as $24. Nevertheless, that’s a sizable amount of buying that shows a solid vote of confidence.
As the name suggests, Complete Production Services offers a full range of energy services, from drilling through closing up a well down after it runs dry. The company operates throughout the Rocky Mountain region, and in Texas, Oklahoma, Louisiana, Arkansas, Kansas, western Canada and Mexico.
Complete Production Services has at least three factors working in its favor.
* Maturing energy fields. Conventional North American oil and gas reservoirs are maturing and production rates are dropping off. So energy companies have to drill more wells, just to stay even. That means more work for Complete Production Services.
* High-tech solutions. Energy companies are turning to unconventional resources since the easy pickings are scarce. This means exploiting energy in tricky formations like “tight sands” which are rock structures that are not very porous; shale, or fine-grained sedimentary rock; and coal seams that contain coal bed methane. To go after these kinds of resources, energy companies have to use more sophisticated technology and engineering. So they turn to specialized energy services companies like Complete Production Services, which has the right stuff.
* Local guidance. But to know exactly what kind of equipment and techniques work best, it helps to consult locals who understand the turf. “Our local and regional businesses, some of which have been operating for more than 50 years, provide us with a significant advantage over many of our competitors,” says Complete Production Services. They have extensive expertise in the local geological basin, and they also have long-term relationships with many customers.
The bottom line: Demand for energy field services is so tight and the insider buying in this stock was so big, I believe this company is a buy right here. But the stock has been volatile since it came out – which is typical of an IPO – so it will pay to be patient or use limit orders to buy.
Disclaimer
At the time of publication, Michael Brush owned shares of Complete Production Services. 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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