I was heavily weighted in the energy sector for years before finally taking my earnings and profits (E&P) during the lull in energy prices (and prices of energy shares) last January. But March’s market disruption again brought out the buyers in this sector, and both EOG Resources (NYSE: EOG) and Kinder Morgan Management LLC (NYSE: KMR) have met my criteria for inclusion on the “Recommended List” of my InsiderInsights.com newsletter.

The bullish fundamentals of the energy sector are straightforward. As CPA Insider™ readers are well aware, world demand for energy is increasing inexorably, and there are no substitutes for fossil fuels for decades to come — fears of global warming, notwithstanding. That demand should keep oil prices high and improve pricing for natural gas in the United States as well.

EOG Resources

EOG Resources is a large cap energy play, specifically in the oil and gas exploration and production business. The insider activity that got my attention at EOG was somewhat run-of-the-mill, but over the threshold for getting me to look at the company’s fundamentals. The buying was only by one director, Leighton Steward, who purchased just over $1.5 million worth of EOG in June at an average price of $77.03 per share. Now, $1.5 million is a decent chunk of change, but not an uncommon dollar value of investment in a large cap like EOG.

More interesting is that after being a director for nearly three years, Steward chose now — after EOG had nearly quadrupled during his tenure — to increase his exposure by more than 50 percent in the stock. That’s a serious bout of averaging up, and a serious increase in his total holdings. Both those factors increase the significance of his buys by my methodology.

But wait, there’s more.

Another positive to EOG’s insider profile is the fact that Fidelity Management has also been a significant institutional buyer this year. A new Schedule 13G filed at the end of 2006 showed that managers at Fidelity had picked up a total of seven percent of EOG’s shares by then. Another 13G filed April 10 showed their position had increased to 11 percent.

Of course, I noted that several officers flipped options earlier this year, but after this large-cap’s gains over the past three years — and being up about 30 percent this year so far — the selling is only to be expected. It is the buying into strength that is unexpected, and therefore significant.
I should qualify EOG’s three-year performance, though. The stock really rocketed during the recent heyday for energy stocks, from 2004 into the beginning of 2006 (an industry trend that insiders led us profitably into). But EOG weakened in the last three quarters of 2006 before perking up again this year (again, mirroring its sector). In any case, with EOG’s short-term trading momentum, and the strength of the fundamentals in the energy sector, I would be surprised if EOG did not break through to new highs this year.

To be sure, EOG’s status as a well-covered large cap has not made it an exception when it comes to the large range of EPS expectations analysts have for E&P firms. For this year, analysts are calling for a slight decrease in EPS, to $4.67, before an increase of 20 percent to 40 percent in 2008.

Blame that on the various assumptions used for oil and gas prices in the models. With my bullish outlook for pricing, I expect EOG to perform better than average estimates suggest, though below high-end expectations. And I expect EOG to deliver at least 25 percent capital gains in the next year.

I’ll keep you posted.

Jonathan Moreland is the Director of Research at New York-based InsiderInsights.com. Click here for a FREE trial issue of the firm's weekly newsletter Insider Insights.