Continental Resources’ President and COO Is Buying

Continental Resources, Inc. (NYSE:CLR), one of the leading shale oil producers with a strong position in North Dakota’s Bakken Shale, has been in the news recently as company founder and CEO Harold Hamm’s wife has filed for divorce. The stock price fell on reports that she could receive- and then presumably sell- a large amount of stock, possibly even threatening Hamm’s majority ownership of the $16 billion market cap energy company.

Winston Bott, who serves as Continental’s President and COO, appears to have tried to take advantage of the response. He directly purchased 1,500 shares of Continental Resources, Inc. on March 22^nd at an average price of $85.59 per share (since then, the stock has risen close to $87). When an insider buys shares, it is likely because they are particularly confident that the stock price will rise- otherwise it would be rational to diversify rather than concentrate more wealth in the same company responsible for their income. As it turns out, stocks bought by insiders exhibit a small outperformance effect (read our analysis of studies on insider trading).

Continental’s crude oil production grew 52% in 2012 compared to a year earlier, playing a major role in the company’s 44% increase in oil and gas sales and 72% improvement in earnings. Between accessing shale resources and not being as dependent on natural gas- where supply has expanded so much that prices have collapsed- Continental Resources, Inc. has significant growth prospects compared to other energy companies. Some growth is reflected in the current price- the trailing P/E is 21- but analysts think that the market is highly underestimating the company. They have the stock trading at 13 times forward earnings estimates- close to the forward multiples of lower-growth companies- and at a five-year PEG ratio of only 0.5.

We track 13F filings from hedge funds as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), but we can also use our database to see which hedge funds owned Continental at the beginning of January. Billionaire Steve Cohen’s SAC Capital Advisors more than doubled the size of its position during Q4, to a total of 1.6 million shares (see Cohen’s stock picks). Citadel Investment Group, managed by billionaire Ken Griffin, reported owning 1.5 million shares at the end of 2012 (find Griffin’s favorite stocks).

EOG Resources Inc (NYSE:EOG), Kodiak Oil & Gas Corp (NYSE:KOG), Whiting Petroleum Corp (NYSE:WLL), and Northern Oil & Gas, Inc. (NYSE:NOG) make a good peer group for Continental. EOG is the only one of these stocks trading at a premium on a trailing earnings basis. It experienced a 16% increase in sales last quarter compared to the fourth quarter of 2011, but even expectations of continued improvements bring it to a higher forward P/E than Continental. As a result we don’t think it’s as good a buy. Whiting reported double-digit growth rates on both top and bottom lines last quarter compared to the same period in the previous year, and it is arguably in value territory at a trailing P/E of 14. This matches up well with large oil majors in our opinion. Kodiak and Northern are both Bakken-focused, though considerably smaller than Continental in terms of market cap. Their PEG ratios are even lower, at 0.3, as they too are expected to see very high growth rates over the next several years yet have lower earnings multiples than Continental.

As such while we are certainly interested in Continental- particularly with this insider purchase- Kodiak and Northern might offer more of an upside for investors who like the Bakken’s prospects. They look like good starting points for further research, though if issues arise we could certainly see Continental as an energy pick based on its fundamentals.

Disclosure: I own no shares of any stocks mentioned in this article.