Warren Buffett is a fan of energy stocks. Here is another strong buy signal.

Warren Buffett isn’t the only one who likes the energy sector. In addition to Berkshire Hathaway’s huge purchases of Occidental Petroleum OXY shares for weeks, energy insiders have been buying large amounts of stock and selling very little. Vickers Insider Weekly has highlighted the energy sector as an insider favorite in four of the past five weeks since September 16.

Buffett plus insiders is a strong signal. Buffett likes Occidental Petroleum’s prodigious cash flow and extensive holdings in the Permian Basin in the US Southwest, which help make it a low-cost producer. But why do insiders buy?

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In the bigger picture, this is because energy stock prices are seriously lagging. But the weakness won’t last forever. “Longer term, this is an industry that will grow,” says Hennessy Energy Transition Investor HNRGX portfolio manager Ben Cook. “There will be supportive commodity prices and good earnings and cash flows in the right companies. It’s attractive and the management teams know it. Insiders recognize that there is a good opportunity.”

Here’s how disadvantaged the energy sector is:

Unjustified discounts

These big cuts seem odd for a half-dozen reasons, energy investment experts say.

Energy companies have become much more shareholder-friendly in recent years, Cook says. They have better discipline in spending capital, which creates strong free cash flow. They return much of that money to shareholders through dividends and buybacks. “Insiders say, ‘I’m willing to take the downside risk because the investment merit of these stocks has improved,'” adds Cook.

Furthermore, CL00 BRN00 oil prices are likely to rise from here. One reason is that the Middle East could be on the brink of a wider war. However, oil did not budge in response. “The risk of geopolitical disruption is not capitalized on in oil at all,” says Cook.

Global interest rate cuts will help. In addition to the Fed, central banks in Europe and Canada cut rates to support growth. “This creates a healthy environment for energy demand,” says Cook. “A growing global economy and the quest for a higher quality of life in less developed countries ultimately means an increased need for energy.” Meanwhile, that capital discipline among American manufacturers is keeping supply in check.

The story continues

Global US energy demand will also support domestic manufacturers and service companies. Global demand will grow at least in line with world GDP growth of 1.5%-2%, Thummel says. “Fossil fuels account for over 80% of the global energy supply and this will not change dramatically in the next few decades.” Meanwhile, global stockpiles and the US strategic reserve are below historic levels.

Artificial intelligence (AI) requires a lot of computing power, which uses a lot of electricity. This demand will favor natural gas (NG) producers, notes Thummel, because power plants use a lot of NG. Green at Penn Capital points out that shares of power producers such as Vistra VST, NRG Energy NRG and Talen Energy TLN have taken off this year. “The vast majority of that power will come from natural gas,” Green says. “But you didn’t recognize that in the price of exploration and production stocks and the service companies that supply the drilling rigs.”

The outcome of the US presidential election will be OK for energy, no matter who wins. Democratic administrations are good for energy stocks because they often tighten supply, Green notes. Meanwhile, Donald Trump’s “drill baby drill” mantra might be irrelevant. “Trump isn’t going to make energy companies drill like crazy because the investor base won’t allow it,” Green says. Investors like the cash flow, dividends and share buybacks that come from capital spending discipline. “The only way they’re going to drill more is if oil prices go up and their cash flow allows them to invest.”

Preferred Energy Stocks to Consider

Hennessy’s Cook says oil services giants Schlumberger SLB, Baker Hughes BKR and Halliburton HAL have been disproportionately punished by the current weakness in the energy sector. He favors quality energy companies with better balance sheets, including Exxon Mobil XOM, Cheniere Energy LNG, EOG Resources EOG, NextEra Energy NEE and ConocoPhillips COP.

Thummel says Chevron CVX shares look excessively bearish because of exaggerated concerns about foreign investment, which he believes will soon start to pay off. He also singles out the Diamondback Energy FANG in the belief that it could be an acquisition target as consolidation among Permian Basin producers continues. “Diamondback is one of the last Permian pure-play producers with significant scale,” he says.

Stocks inside the energy buy

Vickers Insider Weekly highlights bullish energy sector insider buying at: PBF Energy PBF; Texas Pacific Land TPL; Talos Energy TALO; Matador Resources MTDR; Comstock Resources CRK; Global Partners GLP; Hallador Energy HNRG; HighPeak Energy HPK; ProFrac Holding ACDC and Granite Ridge Resources GRNT.

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