Last year was a turbulent one for the oil markets, with the sharp reversal in the oil price trend which had seen prices increasing steadily since early 2007. Oil prices started 2008 at $97.66 a barrel and continued to rise during the first half of the year, peaking at $143.60 on 3 July. Since then, the oil price has fallen by 75 per cent to close at a four year low of $36.17 at the end of 2008.
The oil price volatility has been reflected in company valuations with the FTSE 350 Oil & Gas Index peaking on 21 May 2008, a few weeks ahead of the oil price. By mid-October, the sector had fallen 43 per cent. Since then there has been some recovery in the Index despite the continued decline in oil prices.
We've analysed directors' dealings in the light of these movements. Investors often follow the lead of directors in deciding whether to buy or sell shares. Our methodology screens directors trades to identify those trades likely to be motivated by an investment decision (ie when a director pulls out his cheque book to buy some shares as opposed to a director acquiring shares, for example, as a result of a bonus paid in stock).
Knox D'Arcy's research in directors' trading in UK listed shares shows that certain types of directors' trades can and do outperform the market. A number of trends emerge in directors' dealing activity in UK oil and gas stocks in the face of oil price volatility in 2008.
Directors of oil and gas companies as a whole dealt smartly in 2008, selling ahead of the fall in oil prices and locking in capital gains. Prior to the oil price peak in early July, directors were net sellers of oil and gas shares. During the first six months of the year directors sold to a value of £73.7m compared to investment driven purchases to a value of £2.5m. This indicates that directors were correctly anticipating a fall in oil prices and a corresponding fall in share prices.
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In the second half of the year, there was a reversal in director sentiment with a fall in the value of directors' sales to £17.9m. At the same time there was an increase in investment driven purchases to £10.4m. In addition, the number of investment driven purchases in excess of £100,000 increased from 5 in the first half of 2008 to 23 in the second half with the average value increasing from £22,000 to £55,000.
This trend was particularly marked in the fourth quarter. Investment driven purchases in the last quarter were higher than each of the preceding three quarters. Directors appear to be showing confidence in the sector with net buying activity in the last quarter of 2008 resulting in a buy to sell ratio of 1.37:1 compared to net selling activity and a buy to sell ratio of 0.03:1 in the first six months of the year.
Examples of investment driven purchases in the last quarter of 2008 which appear on our analysis include purchases made by John Orange of Premier Oil who bought £22,000 of stock on 20 November 2008, Paul Davies of JKX Oil and Gas who bought £68,000 of stock on 29 October 2008 and Tom Cross of Dana Petroleum who bought £371,000 of stock on 16 October 2008. By 5 January 2009 the share prices in these companies had increased by 72 per cent, 57 per cent and 33 per cent respectively.
