A challenging macro environment continued to roil markets last week with the S&P 500 dropping 2.4% and the Nasdaq dropping 3.6%. Inflation remained persistently high, rising 7.9% in February, WTI crude briefly touched $130 per barrel earlier in the week (Brent went even higher touching $140 per barrel) and the war in Ukraine shows no signs of abating. The humanitarian toll this unnecessary war is creating is painful to watch. Millions have lost their homes, evacuation corridors have come under shelling and the economic damage this conflict will cause is likely to be widespread.
Given the hit to supply from sanctions on Russia, domestic crude producers like Continental Resources (NYSE:CLR) and Diamondback Energy (NASDAQ:FANG) are uniquely positioned to benefit from higher WTI crude prices. Other companies in the energy complex including transportation companies (pipelines) like Enbridge (NYSE:ENB) and Enterprise Product Partners (NYSE:EPD), service companies like Baker Hughes (NASDAQ:BKR) and Halliburton (NYSE:HAL) and downstream refiners like Marathon Petroleum (NYSE:MPC) and Valero Energy (NYSE:VLO) are also going to benefit from higher oil prices.
Energy Sector Components (Company Website)
Harold Hamm’s $20 million insider purchase of Continental Resources (CLR) is not surprising considering the focus for the U.S. is going to be on domestic production and frackers are uniquely positioned to increase supply in a high crude oil price environment. I got interested in fracking companies and specifically Continental Resources after WTI crude briefly dipped into unprecedented negative territory in April 2020 and we saw a large number of insider purchases across energy companies including Continental Resources. We wrote about Continental Resources in our August 2020 Special Situations Newsletter and it is the best performing stock in the Inside Arbitrage Model Portfolio, up 237% since we added it to the portfolio.
We wrote the following about CLR in that newsletter,
Headquartered in Oklahoma City, Continental Resources was founded by Harold Hamm in 1967. It is one of the largest oil and natural gas producers in the Bakken fields of North Dakota and Montana. Most of the company’s operations are concentrated in North Dakota and Oklahoma. The company produces 58% of its oil and gas from its Northern region, which encompasses North Dakota and Montana. This region is also responsible for 69% of its oil and gas revenue. The rest of its production comes from its Oaklahoma operations. The company uses advanced technology, to place a drill bit in oil reservoirs about the size of a basketball hoop two miles away, after drilling two miles down. Horizontal drilling provides access to resource plays that were previously not economic to produce.
Harold Hamm started buying shares of Continental Resources on the open market on June 23rd and over the course of the next two weeks acquired 10.55 million shares worth $178 million at an average price of $16.87. Following these purchases, he now owns 295.47 million shares representing 81% of the total shares outstanding. Harold Hamm feels so strongly about just how undervalued CLR is that he took the unusual step to announce his purchases through a press release
Billionaires who own a significant portion of a company that are buying even more stock does not necessarily translate into a positive outcome. Because of the large amount of debt on the balance sheet, they might choose not to buy out the minority shareholders and take the company private. We saw this in Ronald Perelman’s numerous purchases of Revlon (REV) through his investment vehicle MacAndrews & Forbes Incorporated from 2017 to 2019.
On the other hand, I have also seen Chairmen of commodity companies that have a long history with the company and have experienced several economic cycles make some astute purchases. These purchases may not play out in the course of a few weeks or even months but do play out over a longer horizon. One such example was the purchases of Southern Copper (SCCO) by its Chairman Germán Larrea Mota-Velasco in 2015 at prices in the mid $20s. Copper bottomed in early 2016 and then went up more than 70% in the next two years. Southern Copper now trades at $43.71 per share.
An insider purchase is usually not enough for me to consider buying a company but provides a good starting point. Digging into Continental Resources made me realize that the company is very shareholder friendly and has taken various steps in recent years including repurchasing shares, retiring debt and starting a small variable dividend. Despite a challenging energy environment over the last several years, CLR has posted an operating loss only twice in the last ten years, in 2015 and 2016.
In an investor presentation from February 2019, Continental Resources indicated that they were cash flow neutral at $45 per barrel WTI oil and each $5 increase in the price of WTI oil would result in a $325 million increase in free cash flow. Considering the company’s reduction of capital expenses and other G&A cost cuts, I would figure breakeven is probably close to low $40s now. September 2020 WTI contracts closed at $40.27 on Friday.
CLR Feb 2019 Investor Presentation (Company Website)
That image from their 2019 presentation has stayed with me as I watched WTI crude prices rise over the last two years and especially the recent significant increase in oil prices on account of Russia’s invasion of Ukraine. During the last decade, production costs dropped in lockstep with oil prices but we are now likely to see some of those costs go up as labor and materials related expenses rise. The company has an update related to the impact of oil prices in their February 2022 investor presentation and the money shot is given below.
CLR Feb 2022 Investor Presentation (Company Website)
I have a position in another fracking company, Diamondback Energy (FANG), and added to my position last week. We also track share buybacks at Inside Arbitrage and wrote about FANG last October following a large $2 billion buyback announcement, representing nearly 14% of the company’s market cap at announcement. We wrote the following about FANG and fracking companies in that newsletter,
What was remarkable about this buyback announcement was that it was coming from a fracking company. When I think of fracking companies, the first thing that comes to mind is the hilarious “meet the frackers” presentation by Einhorn at the Sohn Conference in 2015. I have a great deal of respect for Greenlight Capital’s David Einhorn and I enjoyed reading his book Fooling Some of the People All of the Time, A Long Short Story about his multi-year battle shorting Allied Capital. For a period of time, Einhorn was right about the frackers as they continued to consume ever increasing amounts of capital to drill holes, flood the energy market with excess supply and got hurt by an OPEC engineered price war.
However, this has changed in recent years with companies like Continental Resources and Diamondback Energy reigning in costs and being selective about CapEx. The huge rebound in the price of WTI has helped and instead of drilling more and increasing CapEx, companies like Diamondback are now focused on returning value to shareholders through buybacks and increasing dividends.
Beyond the Continental Resources purchase, there were several other interesting insider purchases last week including independent director Michael Maroone’s purchase of Carvana (CVNA) and President Michael Greenberg’s purchase of Skechers (SKX) as outlined below.
Insider buying increased last week with insiders purchasing $198.06 million of stock compared to $133.06 million in the week prior. Selling declined to $1.37 billion compared to $1.97 billion in the week prior.
Sell/Buy Ratio:
The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by total insider purchases that week. The adjusted ratio for last week dropped to 6.93. In other words, insiders sold almost 7 times as much stock as they purchased. The Sell/Buy ratio this week was favorable compared to the prior week when the ratio stood at 14.82.
Notable Insider Buys: 1. Continental Resources, Inc. (NYSE:CLR): $58.27
Director Harold Hamm acquired 336,844 shares of this oil and natural gas exploration and production company, paying $59.27 per share for a total amount of $19.97 million. Mr. Hamm increased his stake by 0.22% to 156,330,238 shares with this purchase.
P/E: 12.78 Forward P/E: 8.91 Industry P/E: 11.77 P/S: 3.9 Price/Book: 2.79 EV/EBITDA: 6.37 Market Cap: $21.23B Avg. Daily Volume: 2,089,411 52 Week Range: $24.4 – $62.97 2. Shift4 Payments, Inc. (NYSE:FOUR): $49.79
Chairman & CEO Jared Isaacman acquired 202,000 shares of this integrated payment processing and technology solutions provider, paying $47.39 per share for a total amount of $9.57 million. Mr. Isaacman increased his stake by 6996.88% to 204,887 shares with this purchase.
P/E: N/A Forward P/E: 28.61 Industry P/E: 41.79 P/S: 2.06 Price/Book: 10.3 EV/EBITDA: 66.42 Market Cap: $2.82B Avg. Daily Volume: 1,298,680 52 Week Range: $38.88 – $104.11 3. Skechers U.S.A., Inc. (NYSE:SKX): $37.34
President Michael Greenberg acquired 103,000 shares of this footwear & accessories company, paying $37.41 per share for a total amount of $3.85 million. Mr. Greenberg increased his stake by 29.86% to 447,913 shares with this purchase.
P/E: 7.89 Forward P/E: 10.34 Industry P/E: 22.77 P/S: 0.92 Price/Book: 1.79 EV/EBITDA: 9.26 Market Cap: $5.83B Avg. Daily Volume: 1,569,729 52 Week Range: $33.5 – $55.87 4. Carvana Co. (NYSE:CVNA): $113.79
Director Michael E. Maroone acquired 25,000 shares of this e-commerce platform for buying and selling used cars, paying $104.77 per share for a total amount of $2.62 million. Mr. Maroone increased his stake by 99.11% to 50,224 shares with this purchase.
P/E: N/A Forward P/E: -130.79 Industry P/E: 16.38 P/S: 1.58 Price/Book: 33.44 EV/EBITDA: 14715.6 Market Cap: $20.21B Avg. Daily Volume: 3,781,793 52 Week Range: $97.697 – $376.83 5. Hillman Solutions Corp. (NASDAQ:HLMN): $10.92
Shares of this hardware-related products and related merchandising services provider were acquired by 5 insiders:
- COB, President and CEO Douglas Cahill acquired 94,786 shares, paying $10.60 per share for a total amount of $1 million. Mr. Cahill increased his stake by 53.00% to 273,628 shares with this purchase.
- Div President, Hillman US Jon Michael Adinolfi acquired 47,830 shares, paying $10.45 per share for a total amount of $499,823. Mr. Adinolfi increased his stake by 12.73% to 423,685 shares with this purchase.
- CFO and Treasurer Robert O. Kraft acquired 47,500 shares, paying $10.35 per share for a total amount of $491,767. Mr. Kraft increased his stake by 42.19% to 160,094 shares with this purchase.
- Chief Marketing Officer Jarrod Streng acquired 9,500 shares, paying $10.45 per share for a total amount of $99,277. Mr. Streng increased his stake by 94.43% to 19,560 shares with this purchase.
- Div. Pres. – Robo. and Digital Randall J. Fagundo acquired 9,400 shares, paying $10.55 per share for a total amount of $99,169. Mr. Fagundo increased his stake by 41.53% to 32,035 shares with this purchase.
P/E: N/A Forward P/E: 29.51 Industry P/E: 20.75 P/S: 1.49 Price/Book: 1.84 EV/EBITDA: 20.84 Market Cap: $2.12B Avg. Daily Volume: 671,146 52 Week Range: $8.12 – $13.46
You can view the full list of purchases from this Insider Buying page.
Notable Insider Sales: 1. Alphabet Inc. (NASDAQ:GOOG): $2,609.51
Shares of Alphabet were sold by 2 insiders:
- Director Brin Sergey sold 83,234 shares for $2,588.20, generating $215.43 million from the sale.
- Director John L. Hennessy sold 125 shares for $2,639.56, generating $329,945 from the sale. These shares were sold indirectly by a trust.
P/E: 23.26 Forward P/E: 19.2 Industry P/E: 21.27 P/S: 6.69 Price/Book: 6.87 EV/EBITDA: 18.03 Market Cap: $1.72T Avg. Daily Volume: 1,529,398 52 Week Range: $2010.73 – $3042 2. Arista Networks, Inc. (NYSE:ANET): $119.91
Shares of this networking company were sold by 2 insiders:
- Chief Development Officer Andreas Bechtolsheim sold 500,000 shares for $117.82, generating $58.91 million from the sale. These shares were sold indirectly by a trust.
- CTO and SVP Software Engineering Kenneth Duda sold 40,000 shares for $120.25, generating $4.81 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.
P/E: 45.59 Forward P/E: 28.76 Industry P/E: 22.48 P/S: 12.5 Price/Book: 9.27 EV/EBITDA: 34.42 Market Cap: $36.85B Avg. Daily Volume: 2,222,993 52 Week Range: $70.2225 – $148.57 3. Airbnb, Inc. (NASDAQ:ABNB): $145.14
Chairman – Samara & Airbnb.org Joseph Gebbia sold 300,000 shares of Airbnb for $136.85, generating $41.05 million from the sale. These shares were sold indirectly by a trust.
P/E: N/A Forward P/E: 71.15 Industry P/E: 6,135.44 P/S: 15.57 Price/Book: 19.25 EV/EBITDA: 161.63 Market Cap: $93.31B Avg. Daily Volume: 6,514,504 52 Week Range: $129.71 – $215.49 4. Datadog, Inc. (NASDAQ:DDOG): $127.02
Shares of this monitoring and analytics platform for developers were sold by 2 insiders:
- Director Matthew Jacobson sold 161,292 shares for $157.34, generating $25.38 million from the sale. These shares were sold indirectly by ICONIQ Strategic Partners IV, L.P.
- Chief People Officer Madre De Armelle sold 1,502 shares for $133.69, generating $200,797 from the sale.
P/E: N/A Forward P/E: 151.21 Industry P/E: 51.77 P/S: 38.76 Price/Book: 38.22 EV/EBITDA: -3912610 Market Cap: $39.87B Avg. Daily Volume: 4,721,677 52 Week Range: $69.73 – $199.675 5. Walmart Inc. (NYSE:WMT): $142.07
Director Robson S. Walton sold 178,000 shares of Walmart for $139.82, generating $24.89 million from the sale. These shares were sold indirectly by a trust.
P/E: 29.17 Forward P/E: 19.49 Industry P/E: 25.55 P/S: 0.69 Price/Book: 4.73 EV/EBITDA: 12.15 Market Cap: $394.09B Avg. Daily Volume: 8,931,100 52 Week Range: $129.9 – $152.57
