This column was originally published on RealMoney on March 30 at 1:45 p.m. EST. It's being republished as a bonus for readers.

Here we go again.

There have been a number of deep potholes in the rising road that energy shares have traveled over the past couple of years, including December 2004, April and October last year and the present. The first three turned out to be good buying opportunities, and I think the same will hold true for the current dip.

Declarations that the energy bull market is over are just as widespread now as they were during past pullbacks. Even though the increased demand from China, India and other developing nations is widely acknowledged, the energy curmudgeons just don't seem to believe that oil prices can stay as high as they've been for much longer.

However, insiders in the sector seem surprisingly bullish, given the large percentage gains they are sitting on. There is hardly a rush to take profits, and though insider buying may not be as obvious now as it was several years ago, when strong purchasing made it a no-brainer to invest in the sector, the recent weakness has spurred a new round of buying.

I'm sticking with the partners I re-entered the dance with in the fall: the exploration and production firms PetroQuest Energy ( PQ) and Goodrich Petroleum ( GDP). I pointed out in November that purchases by insiders in the second half last year were particularly interesting because they represented a bullish "averaging up" of positions.

So it was a comfort to see Goodrich director Josiah Austin buy in once again as it weakened from nearly $30 in January to the mid-$20s in February. The purchases I highlighted in November were made at $20.

There's been no new buying at PetroQuest, but no selling. Considering that PetroQuest is up over 400% the past four years, I could have forgiven some profit-taking.

Excellent Financials

PetroQuest's and Goodrich's recent operating results and forward-looking statements add to my optimism. PetroQuest's revenue soared 77% to $39.9 million in the fourth quarter vs. the same quarter a year ago, and EPS rose 55% to 17 cents. Net cash flow from operations jumped 66% to $27.7 million. More importantly, management is projecting a 50% increase in production this year.

Still, PetroQuest sold off with the rest of the sector. The concern seems to be that oil and gas prices are due to fall and that profits in the sector will naturally tumble as well. However, because of its hedging operations last year, PetroQuest's average selling price was only $45.76 a barrel for oil and $7.47 per million cubic feet for gas products. With much higher-priced hedges in place for a portion of its 2006 production, it would take quite a collapse for the company's average sales price to fall markedly below last year's. It's more likely to rise, and on much higher output as well.

Goodrich's prospects also seem excellent. Fourth-quarter revenue rose 93% vs. the same quarter a year ago and 46% sequentially. Goodrich's EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses) was up 25% for the quarter and 22.6% for the year. Discretionary cash flow rose 19.7% on the year to $32.2 million. This is particularly good considering that Goodrich's financials also suffered from unprofitable hedging.

Proving that it knows how to do the most important thing in its business, Goodrich drilled 64 wells in 2005 with a 97% success rate. Net production volume increased 13% last year despite the effects of hurricanes Katrina and Rita. Its total proven reserves increased 71% to 173 billion cubic feet equivalent, and more solid production increases are expected this year.

An OTC Play

Another intriguing sign of just how bullish energy executives are comes from the booming business of another energy play I entered last year: Seitel (OTCBB: SELA). Don't let this stock's bulletin-board listing scare you off -- its market cap is nearly $500 million, and it has plenty of trading volume. It's making a successful recovery from bankruptcy and could regain an exchange listing in a year.

Seitel has one of the largest libraries of 2D and 3D onshore and offshore seismic data in North America, which it sells to explorers and drillers. While the company's offshore (mainly Gulf of Mexico) data are relatively easy to duplicate, its onshore library is more unique. It takes a lot of authorization from private landowners to get this information.

It's a great time to be in Seitel's business. Exploration and production expenditures were up over 20% last year and are expected to rise 15% in 2006. There's just a heck of a lot of drilling going on, which is a telling sign that executives think oil and gas prices aren't about to fall very far for very long.

Seitel's revenue backlog at the end of the fourth quarter rose to $39 million from $17 million last year. The company's cash on hand rose over 80% to $78 million. Seitel also broke back into the black in the fourth quarter. For the next year or two, investors can expect strong growth in cash flow and earnings.

Although Seitel looks extremely pricey on a P/E basis, cash flow is a more important metric, given its tremendous depreciation and amortization costs. Seitel generated about 75 cents per share in EBITDA last year. Not bad for a $3 stock -- or even a $5 one. EBITDA per share was $1.32 in 2004, but Seitel had double the number of shares outstanding last year. I think the lower number in 2005 was worth the better balance sheet, and I expect solid growth in this metric in the coming two years.

Earnings junkies can take comfort from the fact that 61% of Seitel's fourth-quarter sales were from data that have already been fully amortized over the four-year lifespan Seitel uses in its profit-and-loss statements. This tells me that current expectations for EPS of 11 cents in 2006 are probably light and that the company's assets are more valuable than the market believes.

A couple of Seitel execs started to take profits last week, but I'm not concerned. After all, the stock is up over 100% since November. The steady institutional interest that the company has attracted is a very reassuring sign.

ValueAct Capital increased its already sizable position in Seitel at the beginning of March, buying stock and warrants totaling about 37 million shares. ValueAct is known for taking large positions in firms that it deems very undervalued and for working actively with managements to unlock value. That ValueAct continues to see value after Seitel's great run is quite a positive indeed.

Third Point Management, which is run by Daniel Loeb, also invested in Seitel when it emerged from bankruptcy and has been a steady holder.

I think PetroQuest, Goodrich and Seitel remain good buys despite their substantial appreciation. Ditto for two other firms I mentioned in November: Chesapeake Energy ( CHK) and Nabors Drilling ( NBR).

Other energy plays with more recent insider buying are Helix Energy Solutions ( HELX) and Cano Petroleum ( CFW).

However you play it, I think energy is a good bet for the long as well as the short term.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Seitel, PetroQuest and Cano Petroleum to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

P.S. from Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to's RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.
At the time of publication, Moreland was long PetroQuest, Goodrich and Seitel, although holdings can change at any time.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.

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