A director has been buying lots of shares in this FTSE 250 company

Silhouette of an oil rig

I like to keep an eye on director dealings. When directors sell shares it can be a red flag, on the other hand, when they buy investors should take note, especially when the amounts are meaningful. So I was intrigued to notice a FTSE 250 non-exec director buying Energean (LSE: ENOG) shares recently.

On 15 July, Efstathios Topouzoglou, bought over £260,000 worth of shares in two separate transactions. He was already a substantial shareholder along with the CEO, so they have skin in the game, which is another positive. In theory, it aligns their interests with those of other investors.

Energean is an oil and gas exploration company based primarily in the Mediterranean but also with assets in the UK’s North Sea. The operations span Israel, Egypt, Croatia, Malta, Greece, Italy and Montenegro.

What’s good about the FTSE 250 company?

It has multiple assets so isn’t reliant on any one area for oil and gas. It’s also projected to significantly increase revenues from £28m in 2020 up to £1.1bn in 2022. That’s massive growth that I think comes largely from the $284m Edison Exploration & Production, which completed at the end of last year.

Arguably it’s a positive that the shares have become much cheaper recently, though of course they could continue to fall. So it could also be a value trap. The sell-off in the shares has been particularly sharp very recently. That might be because of concerns around interest rates, which would hit indebted companies like Energean hardest.

Why following the director buy could be a bad idea

Buying shares in a company just because a director does isn’t a foolproof plan. It doesn’t guarantee anything. The likelihood is that although Mr Topouzoglou probably isn’t in the habit of losing money and buying shares if he’s not confident, he’s probably still not bet his entire wealth on the firm.

Let’s be clear, despite being a FTSE 250 business, investing in Energean comes with some major risks. It has substantial debt. In fact, far more debt than cash. Its current ratio is well below one, indicating it could have financial problems soon.

Also as oil and gas explorer it’s an inherently risky business and always at the mercy of the international markets that dictate prices. There’s talk of gas being phased out and National Grid is beefing up its electricity distribution – seeing that as having a brighter future.

On the balance of risk versus reward, I’m going to steer clear of Energean, despite the recent director buying and substantial holdings of the CEO and non-exec director. The risk of bankruptcy seems just too high to me. In the commodities sector, I much prefer Ferrexpo that combines being cheap with a high yield, despite it being a very cyclical business. I recently added it to my portfolio.

The post A director has been buying lots of shares in this FTSE 250 company appeared first on The Motley Fool UK.

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Andy Ross owns shares in National Grid and Ferrexpo. The Motley Fool UK has recommended National Grid. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.