In today’s Money Morning…why insiders buy and sell…what these insider moves mean for the oil industry…the biggest IPO in history…and more…
Legendary investor Peter Lynch once said ‘insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.’
And the boffins at Harvard Business School confirmed it in a study of US equity markets.
They found that the returns earned by insiders when they trade their company’s stock beat the index by 6% per year.
That type of return would make a fictional ‘Insider Funds Management Pty Ltd’ one of the best performing funds in the world!
I’m not sure the regulators would be too happy about such a business…
But the results make sense, don’t they?
It’s easy to think why such a result is the case.
No, I’m not talking about illegal insider trading. Not that it doesn’t go on, I’m sure. But the simple fact is that no one knows the ins and outs of a company better than the CEO, CFO and various directors running it.
They have superior access for start — not necessarily to better information, but they are able to join the dots together a lot easier than an outside analyst is. The ‘why’ can be just important as the ‘what’. And there’s less illegality around knowing why something is happening in a company.
And these people are just as greedy as everyone else. So it’s natural they buy up when they see an opportunity.
Which makes the following table from July interesting:
[Click to enlarge]
You can see that inside buyers in the oil sector were more than the rest of the market combined! It’s only one week’s worth of data, but it’s the kind of signal that warrants further investigation.
With the oil sector close to GFC lows, insider buying now could indicate that current share prices represent good value for investors.
There are some early fundamental signs of a turnaround, too. Just today, oil and gas producer Santos [ASX:STO] announced an underlying profit of $156 million. That’s up from a loss of $5 million a year earlier. Though with asset write-downs the accountants booked a statutory half a billion dollar loss, it’s still a big improvement on last year.
Corporate insiders making moves
In a corporate case of ‘insider’ buying, the French oil giant Total has just completed the purchase of Danish company Maersk. Commenting on the US7.5 billion deal, Total Chief Executive Patrick Pouyanne said this:
‘It was time for us to do what a real oil and gas company would do in a period such as this when prices are lower and costs are down. Either launch new projects or acquire new reserves at attractive prices,’
The purchase signals some oil majors are prepared to invest to replenish reserves and boost production, anticipating an oil price recovery. A corporate version of buy low, sell high.
Maersk is a private company, and had been contemplating a share market float. But clearly an IPO in a tense oil market, with prices at $50 a barrel, would have been a risk.
Elsewhere, BHP [ASX:BHP] confirmed on Tuesday in their earnings announcements that they were looking to get out of the shale oil business.
Now, some think that is due to the low oil price. Others think that the economics of the shale oil industry are perhaps not as attractive as they once seemed. And wouldn’t be, even at higher prices.
It’s becoming harder and more expensive to extract shale oil over time. The ‘easy money’ gets drilled first, leaving the more costly deposits behind.
This is true of all oil exploration to a degree, but the process may be more rapid in onshore drilling than say offshore, where finding the easier deposits is harder to begin with.
The biggest IPO in history is coming
Which brings me to Saudi Arabia. No one has more oil. Its history, its wealth and its future are tied up in the black gold.
And some big moves are on the horizon.
Saudi Arabia are planning their own IPO at some point in 2018. They are gearing up to sell shares in Aramco, the state oil company, in what will be the biggest IPO in history.
The market value of Aramco is estimated to be around US$2 trillion — significantly more than Alibaba Group’s [NYSE:BABA] US$25 billion, which shattered IPO records in 2014.
What’s more, only 5% of the company is set to be sold off! It’s the start of a plan for the Saudi’s to begin the process of diversifying their economy.
Even with only 5% of the company up for grabs, it is still set to be the world’s biggest IPO.
But unlike the comparatively puny Maersk, Aramco has massive oil pricing power. It’s the biggest oil producer in the world, and could have 266 billion barrels of reserves — though the Saudis keep the exact number close to their chests.
A stronger oil price is in their interests. And they have the ability to do something about it.
This IPO will be a massive story over the next 12 months.
And my colleague Greg Canavan thinks the flow-on effects of this whole process are creating some fantastic investment opportunities right now.
I strongly urge you to read his new report.
Editor, Money Morning