Oil patch executives are showing their faith in made-in-Canada energy by stepping up their purchases of shares in their own companies, a trend that flies in the face of rising insider sales in other sectors.
At a time when domestic oil and gas plays face serious headwinds in the form of low commodity prices, pipeline bottlenecks and concerns about climate change, insiders are buying stock at a steadily increasing number of Canadian energy companies, according to a report published on Friday by AltaCorp Capital Inc. The Calgary-based investment bank found that in September, senior executives and directors were snapping up shares at more than two-thirds of the domestic oil and gas companies it tracks. AltaCorp’s research shows insider buying bottomed out in the spring of 2016, about a year into a continuing slide in commodity prices, when just 15 per cent of domestic companies reported insiders were buying shares.
“While weakening economic data, trade tension and record valuation levels for many companies have spurred insider selling, Canadian energy insiders appear to remain confident in their businesses,” said Patrick O’Rourke, an energy analyst at AltaCorp. He said: “The insider activity in the energy sector suggests management teams see a growing disconnect between their share prices and business fundamentals.”
Insider buying in the oil patch comes at a time when corporate leaders in other sectors are cashing in stock at a furious pace on the back of a decade-old bull market. Statistics from Smart Insider, a U.K. data firm, show insiders at U.S. companies sold US$19-billion of equity so far this year, and are on pace to cash in US$26-billion. That would make 2019 the most active year for insider sales since the run-up to the dot-com boom in 2000, when insiders sold US$37-billion of stock before a market correction.
Insiders at energy companies large and small are eating their own cooking. The chief executive officer, former chief operating officer and chief financial officer of Encana Corp. were all buying stock this summer, even though what was once Canada’s largest oil company is in a prolonged slump, with its stock price down 60 per cent over the past 12 months.
Michael Rose, the CEO of Tourmaline Oil Corp., has consistently been betting on himself and his team by buying stock. Insiders are also stepping up at Birchcliff Energy Ltd., adding to their holdings as the stock price fell more than 50 per cent in the past year, a decline that meant Birchcliff was one of eight energy stocks dropped from the S&P/TSX Composite Index in late September because the market capitalization fell below the benchmark’s threshold. Mr. O’Rourke said: “These CEOs look at risks and rewards, and they see compelling value.”
Insider buying in the oil patch is based on fundamentals for energy stocks, and a belief that fossil fuels have a promising future. Analyst Phil Skolnick at Eight Capital said most Canadian oil and gas stocks are relatively cheap by conventional metrics.
“When we talk to management teams, they are confident in the resilience of their businesses and the strength of their balance sheets at lower oil prices, particularly given the focus on reducing cost structures,” Mr. Skolnick said. “This is especially true for the oil sands and integrated companies, which are, for the most part, generating strong free cash flow and have relatively low decline rates on their reserves.”
To date, oil patch executives are losing money by betting on their own companies. Altacorp’s Mr. O’Rourke said stock prices of the energy companies his firm follows are down an average of 28 per cent, year-to-date, and as prices fell, the pace of insider buying picked up. The show of faith from domestic insiders comes in spite of what global oil companies are doing in Canada. A string of international players, including ConocoPhillips Co., Royal Dutch Shell PLC and Total SA, got out of the Alberta oil sands in recent years.
There are plenty of reasons for insiders to sell stock: They could be taking profits, buying a new home, donating to a charity or paying for a divorce. Insiders buy for only one reason: They expect the stock price to rise. In Canada’s beleaguered oil patch, insiders are increasingly bullish.