Bakken Shale-focused Oasis Petroleum Inc. (NYSE:OAS) has been riding the shale oil boom. In the second quarter of 2012 its revenue was more than double its revenue from the second quarter of 2011, and net income grew 128%. Earnings per share rose at the same rate as shares outstanding remained roughly unchanged. This performance actually represents a slowing of the company’s growth: in the first half of the year net income more than tripled compared to the same period in 2011, yielding a dollar per share. At a current price of $30.60, it is therefore trading at 15 times the annualized earnings from the first half of the year- with potentially more growth still to come. Sell-side estimates place the forward P/E at 13 and the five-year PEG ratio at 0.6.
So why did John Scully’s SPO Advisory Corp sell 300,000 shares of the stock on September 6th, at an average price of $30.87 per share? The fund retained a large position in Oasis, 9.2 million shares, but it is possible that it has more sales in its sights. C-level executives have also been selling shares: President and CEO Thomas Nusz has reported selling 425,000 shares so far this month, and the COO has sold 100,000 shares as well. We don’t always focus on insider sales as it is smart for insiders to diversify their wealth away from the company where they also earn their incomes; however, to see two top executives selling a significant number of shares at the same time a major investor is cutting its stake is a bit worrisome.
SPO Advisory Corp is a value investing fund founded around 1990 by John Scully, the late William Patterson, and William Oberndorf. Scully has an MBA from Stanford and is also a graduate of Princeton University’s Woodrow Wilson School. His work outside finance includes the Making Waves Educational Program and participation on several Stanford boards. SPO is most famous for an investment in Plum Creek Timber in the 1990s. It tends to hold a very concentrated portfolio; according to our database, over half of its invested capital was in only four stocks. Research more stocks the fund reported owning at the end of June.
The fund could be taking profits, but the stock’s returns have shown little deviation from the market’s. It may also be trying to free up capital for new investment ideas. However, based on the insider sales our guess would be that it does think that Oasis Petroleum Inc. is overvalued. As we’ve mentioned, the company has been doing well recently and its earnings multiples appear quite generous. Major oil companies have committed to the Bakken Shale- for example, Statoil ASA (NYSE:STO) purchased Brigham Exploration and Production earlier this year. Energy services companies such as Schlumberger Limited (NYSE:SLB) have also been aggressive in expanding into the area. So the Bakken appears to be set for high production for decades.
In fact, Oasis Petroleum Inc. looks fairly priced compared to two other pure-play Bakken companies. Kodiak Oil and Gas Corp (NYSE:KOG) trades at 25 times trailing earnings, with rapid expected growth bringing its forward multiple to 12 and a five-year PEG ratio of 0.4. Northern Oil & Gas, Inc. (NYSEAMEX:NOG) has trailing and forward P/E multiples of 15 and 13, respectively, with the five-year PEG ratio coming in at 0.5. Oasis is a bit more expensive, particularly when looking at the five-year PEG, but given the uncertainty in analyst estimates we wouldn’t say that the difference is significant.
SPO was by far the largest holder of Oasis in our 13F database for the second quarter of 2012, having reported ownership of 9.5 million shares at that time (which had been unchanged from three months earlier). Donald Chiboucis’s Columbus Circle Investors was the next largest investor, and its stake of about 830,000 shares was down 5% from the end of March (see what stocks Columbus Circle likes). Between its sales and those of insiders, we would suggest that current investors follow suit. If exposure to the Bakken is desired, perhaps switching to Kodiak or Northern would prove a better investment.