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Lit Fuse: Insider Buying in Energy

Stocks in this article: MDR SD PSX COP

Some insider buying in this sector is getting the attention of analysts, media and investors particularly at McDermott International (MDR). MDR operates as an engineering, procurement, construction, and installation company worldwide. It focuses on designing and executing complex offshore oil and gas projects. The company employs 13,500. They provide designs and installation for fixed and floating structures, pipelines and subsea systems and shallow and deepwater construction services.

MDR operates in more than 20 countries and has a number of key joint ventures including one with a subsidiary of state-owned China Shipbuilding Industry.

On June 4 and 5, two officers and two company directors purchased $2,626,327 worth of MDR shares as prices ranging between $9.33 and $9.64. The 52-week low on the stock was intraday on June 4 at $9.04. So their timing was impeccable.

MDR is trading at a little over eight times forward earnings and at a trailing-12-month price-to-sales ratio of only 0.75 - a reading below 1 is a fairly reliable indicator that the share price is undervalued.

Their first quarter 2012 financial results demonstrated the earnings power of this cashed-up company and the profitable prospects going forward. Their balance sheet looks quite good. According to the company's press release:

As of March 31, 2012, McDermott reported total assets of approximately $3.1 billion. Included in this amount was $899.5 million of cash and cash equivalents, restricted cash and investments.
Net working capital, calculated as current assets less current liabilities, was $605.1 million. Additionally, total equity was almost $1.8 billion, or approximately 58% of total assets, with total debt of $92.2 million.

This helps explain why company insiders want to own shares of MDR. Two institutions are also big believers in the prospects for this company.

Artisan Partners Limited Partnership and FMR (a.k.a. Fidelity Investments) each own close to 6% of the outstanding shares of MDR as of March 30, for a combined investment of almost $357 million dollars.

MDR has a market cap of only $2.14 billion, so it isn't unreasonable to imagine a much larger company acquiring them to expand their international operations. Two names that come to mind are Schlumberger (SLB) and Halliburton (HAL).

Beyond MDR

There are other small-to-mid cap size energy companies who have recently seen an increase in insider buying.

They include Sandridge Energy (SD), an independent oil and gas company based in Oklahoma. It recently saw one of their directors increase his direct and indirect ownership of the company's stock to an impressive 1.45 million shares.

Other insider transactions from the energy patch included Phillips 66 (PSX), the company recently spun off by ConocoPhillips (COP).

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