After a choppy start to the summer, the energy sector is suddenly heating up again. While many investors remain laser-focused on mega-cap tech stocks and trendy AI names, it's worth pointing out that the S&P 500 Energy Sector SPDR (XLE) closed out July on a gain of 7.8% - easily besting last month's 2.6% advance for the S&P 500 Technology Sector SPDR (XLK).
Despite the positive momentum in recent weeks, the energy sector still appears relatively undervalued when compared to the broader S&P 500 Index ($SPX). The S&P 500 Energy Index is trading at a forward price/earnings ratio of 11.7, compared to 19.8 for the SPX. This suggests the energy sector has room to extend its outperformance in the near term.
But which energy stocks are the best picks in the sector right now? One way to drill down on the most promising names is by following what company insiders are doing with their money via publicly available Form 4 filings.
"Insiders" are a group that includes a company's officers and directors, as well as any shareholders with a stake of 10% or more. These company insiders are expected to be more intricately aware of the challenges, opportunities, and future outlook for their own company than the average investor. Consequently, if insiders are buying shares with their own money, it's generally considered to be a fairly significant vote of confidence in the stock.
With this in mind, let's take a look at three energy stocks insiders are actively buying - and whether or not the shares are worth adding to your own portfolio at current levels.
Energy Transfer LP
Founded in 1995 by Ray Davis and Kelcy Warren, Texas-based Energy Transfer LP (ET) transports, stores and processes natural gas, natural gas liquids (NGLs), and crude oil. The company is one of the leading midstream energy companies in the U.S., commanding a market cap of $40.69 billion.
The company posted mixed results for the second quarter ended June 30, 2023. Revenues fell 29.4% year-over-year to $18.3 billion, below the consensus estimate of $20.4 billion. Earnings per share (EPS) declined by an even sharper 35.6% to $0.25, narrowly surpassing the consensus estimate of $0.24 per share.
ET did successfully deleverage its balance sheet over this time frame, as its long-term debt decreased to $44.7 billion in the April-June period, compared to $48.3 billion in the prior year.
Operationally, the company has been making moves through its Lake Charles LNG Project. A few weeks ago, the company signed an agreement to export roughly 3.6 million metric tons per annum of LNG to its customers in the U.S. and Asia.
So far in 2023, Energy Transfer stock has outperformed the wider XLE by a significant margin. While ET is up 8.8% year-to-date, XLE has declined 1.3% over the same period.
Along with its share price outperformance, Energy Transfer also offers an impressive dividend yield of 9.26%.
Chairman Kelcy L. Warren seems to think the stock is a value, based on insider buying activity. Warren bought ET shares four separate times in May 2023, accumulating a total of 2.5 million shares at an average price of $12.66. The latest insider to buy shares of the company was EVP Bradford D. Whitehurst, who purchased 10,000 shares of the company at an average price of $12.43 on May 30.
Analysts also like the prospects for ET, judging by the consensus “Strong Buy" rating on the stock. Out of 11 analysts covering the stock, 10 have a “Strong Buy” rating and 1 has a “Moderate Buy” rating, with no “Hold” or “Sell” ratings at all. Plus, the mean target price of $16.92 indicates upside potential of about 30% from current levels.
Plains GP Holdings
Formed by the 2013 merger between Plains Exploration & Production Company and Plains All American Pipeline, Plains GP Holdings (PAGP) is a holding company that transports, stores, and processes crude oil, natural gas liquids (NGLs), and refined products in the U.S. and Canada. PAGP, which has a widespread network of pipeline transportation assets, commands a market cap of $2.95 billion.
The company is slated to report its results for the second quarter on Thursday, Aug. 4. Previously, Plains GP posted a mixed set of numbers for its first quarter. Revenues fell 10% to $12.3 billion in the January-March period, missing the consensus estimate of $12.84 billion. However, EPS soared by almost three times from the prior year to $0.52, and comfortably outpaced the consensus estimate of $0.27.
Similar to ET, the company did reduce its total debt by about $450 million in the prior quarter, taking its net debt to $7.4 billion from $8.1 billion as of Dec 31, 2022. Additionally, the company's cash-generating abilities also improved, as net cash from operating activities in the first quarter stood at $743 million - up a significant 54.2% from the previous year.
In terms of share price performance, PAGP has performed quite well in 2023. The stock is up more than 22% YTD, outpacing not only the XLE but also its peer ET.
Beyond its share price gains, PAGP also offers a healthy dividend yield of 6.82% for income-minded investors.
However, PAGP hasn't attracted nearly the volume of insider buying that ET has recently. Out of the last five insider transactions, only two are noteworthy purchases - Chairman and CEO Willie C. Chiang bought 75,000 shares in early May at an average price of $13.25, while board member Ellen R. Desanctis picked up 10,000 shares at $11.98 as far back as August 2022.
Analysts are optimistic about PAGP, considering the consensus “Strong Buy” rating and mean target price of $16.54 - indicating an upside potential of about 9% from current levels. Out of 13 analysts covering the stock, 10 have a “Strong Buy” rating and 3 have a “Hold” rating.
HighPeak Energy
Formed by a tie-up between HighPeak Energy and Pure Acquisition Corporation in 2019, HighPeak Energy (HPK) is a Texas-based oil and natural gas company focused on the development of unconventional oil and natural gas reserves. The company, which has a contiguous position of over 100,000 net acres located primarily in Howard County, commands a market cap of $1.56 billion.
The company - which is slated to report its earnings for the second quarter on Monday, Aug. 7 - posted year-over-year improvements in both revenue and EPS for Q1. Revenues jumped 142.7% year-over-year to $223.8 million, while EPS improved to $0.39 from a loss of $0.17 per share in the previous year. Unfortunately, both metrics failed to surpass consensus estimates.
In terms of operational guidance, the company announced that it would reduce its drilling count from 4 to 2 rigs through the second half of 2023. However, the drilling activity is expected to revert back to 4 rigs in early 2024.
Net cash provided by operating activities rose fourfold in Q1 to $190 million, while long-term debt was reduced to $645.5 million from $704.3 million at the beginning of the year.
In terms of delivering value to shareholders, HighPeak's dividend yield is much lower compared to both Energy Transfer and Plains GP, at just 0.69%.
The share price performance has also been nothing to write home about. Highpeak Energy stock is down 36.8% YTD - underperforming the broader XLE by a wide margin.
At first glance, it may seem that some notable insiders - including the President and CEO of the company - have bulked up on the stock recently. On July 19, Chair and CEO Jack D. Hightower, along with President Michael L. Hollis and several other insiders, pinged insider buying radars with massive additions of HPK.
However, a closer look shows that these simultaneous purchases were classed under “subscribe” - meaning the execs committed to buying into HPK's July 19 public offering of common stock. Upon closer inspection, insiders haven't bought the stock outright with their own money since January.
All in all, analysts are cautiously optimistic about the stock, giving HPK an overall rating of “Moderate Buy” with a mean target price of $22.50. This indicates upside potential of about 55% from current levels. That said, HPK does not have wide coverage among analysts, with only 2 “Strong Buy” ratings and 1 “Strong Sell” rating in total.
Valuation
In terms of some key valuation metrics, PAGP appears to have the edge over its peers.
PAGP's price/sales (P/S) ratio is 0.05, much lower than HPK (2.17) and ET (0.46). Meanwhile, in terms of the price/cash flow (p/cf) ratio, PAGP trades at a tamer valuation of 2.68 - again, lower than HPK at 3.50 and ET at 4.82.
However, in terms of forward price/earnings (p/e), HPK appears relatively undervalued when compared to its peers. HPK is currently trading at a forward p/e of 7.30, which is lower than ET (10.22) and PAGP (14.60).
Final Takeaway
Insiders buying shares of their own company generally indicates a strong vote of confidence about the company's future prospects from the very people who are running it. Since they have a much more detailed picture of the company's drawbacks as well as its strengths, it's always worth paying attention to what these insiders are doing with their own money - although, as we've seen, not all insider buys are equally compelling.
Among these three stocks, I believe that Energy Transfer is the most attractive choice for investors at current levels. The company offers a solid balance sheet, operational strength, and a high dividend yield. Supported by strong analyst ratings, competitive valuations, and notable insider buying activity, ET should have strong fundamental footing to extend its share price outperformance in the near term.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
