Squabble in the Oil Patch

Every so often, corporate insiders send signals so much in conflict with Wall Street sentiment that you'd prefer to ignore them. The insiders are not always right, mind you, but if there is one thing I've noticed, it's that you fight the data at your own peril. Being wrong is bad enough, but nothing stings quite so badly as having been bullied into abandoning your investment discipline.

This comes up because it seems that every day someone else is pitching oil service stocks as a refuge from these volatile, tech-unfriendly times. After all, what could be more Old Economy than roughnecks providing equipment and services to oil and gas rigs? And Old Economy or not, most everyone agrees that earnings in the group will continue to recover from the abysmal levels inflicted by $10-per-barrel crude.

Problem is, while insiders at the major integrated oils are sitting tight, those at the oil service companies continue to take profits during what Wall Street would have you believe is the early stages of a prolonged rally. Among those selling shares during the recent rally are insiders at Nabors Industries (NBR), BJ Services (BJS), UTI Energy (UTI), Smith International (SII), and National Oilwell (NOI).

At pressure pump and oilfield service provider BJ Services, for example, the selling has been going on since the beginning of the year. All told, 13 insiders have sold a combined 865,225 shares into generally rising prices of 49 1/16 to 70 5/16.

At Smith International, which provides a variety of oilfield products and services, insiders likewise began selling back in January. Thus far this year, four insiders sold a combined 267,563 shares at 48 1/2 to 58 3/8.

Joining the fray in February, five insiders at contract driller UTI Energy sold 175,960 shares at 27 7/8 to 30 3/8, while four National Oilwell insiders sold 639,830 shares at around 22. Finally, standing head and shoulders above the pack, seven Nabors Industries insiders unloaded more than 7.6 million shares in February and March in the high 30s to low 40s.

You may have heard about this last one. Curiously, at the time of the sales, Nabors announced that its three top executives would sell 7.5 million shares. According to Chairman Eugene Isenberg -- the heaviest seller at 4.7 million shares -- the sales were motivated by estate planning and diversification considerations.

This makes sense: After plummeting more than 70% to nearly 10 a share in 1999, Nabors shares had rallied nicely enough to enable the insiders to sell at around 40. It wouldn't have made sense to sell with the stock price in the gutter, yet the fact that insiders appear to be picking their price to get out makes their activity more, not less, interesting.

More puzzling perhaps is Nabors' insistence that the sales represented a "minority of the shares held by each seller." While technically true, given that the holdings reductions ranged from 37% to 45% of these insiders' total actionable positions (common stock plus exercisable options), the characterization may strike some investors as a rather curious boast.

That said, the real issue isn't the activity at any one company. The nagging question is why insider trade data for the group is telling us one thing while the Street appears to be saying something so entirely different. One possible explanation is that capital spending by the major oils hasn't picked up quite as quickly as originally expected -- a fact even the bulls will admit. Another is concern that a further bout of consolidation could reduce the overall demand for oilfield services. Whatever the reason, if you join Wall Street in this latest rush for a safe haven, realize that you're buying what the oil service insiders are selling.

>To order reprints of this article, click here: Reprints