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Hunting ahead of expectations as post-Covid drilling increases


Hunting Plc [LON:HTG], the oil field services company is set to publish its interim results next Thursday (24th August).

Hunting, headquartered in London, but operating in 11 countries, manufactures components, technology systems and precision parts for the oil and gas industry. The company has been in business since the 1870s, with its founder, Charles Samuel Hunting a veterinary surgeon moving into the oil exploration game after founding a shipping company.

The company invested in a Texan oil exploration endeavour and ventured into air transportation during the First World War eventually going into aircraft manufacture. The industrialisation of combat during the Second World War saw Hunting’s tanker fleet decimated, and the company took the route of further diversification to allay its losses. Its oil venture had prospered with Hunting participating in the Texan oil rush and building up a position in the Canadian oil industry, it had developed a leading defence company, had gone into geophysical and aerial surveying and was developing its aircraft maintenance business and created a passenger airline.

Hunting refocussing on O&G services

In the 1960s Hunting refocussed on its original business, the oil sector, and used the experience it had gained in aircraft maintenance and manufacture to develop a company that supported the vast expansion of the oil sector post-WWII. The company had grown so big that it made thee listings on the London Stock Exchange, but consolidated in 1989 under Hunting Plc. The following decades saw Hunting grow in line with the growth of the North Sea oil and gas industry, the firm also operated in the defence sector, specifically through a contract to manage the UK’s Atomic Weapons Establishment.

Today Hunting is wholly committed to the oil services industry, and its current operations include: well construction, providing products and services for the construction phase of the wellbore development; well completion, providing products and services that support the completion and re-completion phases of wellbore development, and; well intervention, providing products and services that support the intervention and subsea support phases of wellbore production and maintenance.

The company opened trading on 16th August at 255p and the oil services company has offered a year-to-date return of -23.4%, a one-year return of 16% with its shares ranging between 190p and 354p over a 52-week period. Hunting has a market capitalisation of GBP418m.

Berenberg Bank recently upgraded Hunting to ‘Buy’ from ‘Hold’ as it pointed to an attractive valuation and strong international sales. The bank, which upped its price target to 345p from 325p, said the pullback in the shares since March was overdone, with the stock now trading on FY 2023/24 EV/EBITDA of 4.4x/4x respectively, well below historical averages. The bank said its downgrade to ‘Hold’ in March was driven by a falling US rig count that has continued to soften, down 99 rigs to end-July to 680.  Canaccord Genuity raised their target price for Hunting from 350.0p to 375.0p in December.

In its last update Hunting advised that trading was ahead of expectations on the back of international market strength, leading to Hunting’s revenue and profits expected to be ahead of target set at the beginning of the year. Management said in January that it was targeting a long-term EBITDA margin target of 15% and has committed to a sustainable and growing dividend policy targeting an average increase of around 10% per annum until the end of 2030. The company also said that performance was ahead of the comparable period in 2022.

Ahead of expectations

Hunting is expecting earnings of between USD48m and USD50m with robust sales of USD530m to USD550m up from USD473m at the close of the calendar year. The company has had good performance in North America, which ordered equipment primarily for Latin America projects. Asia also performed strongly and is expected to have returned to profitability. EMEA was a bit slower than the Americas and Asia, but is expected to break even.

Net debt will be in the region of USD52m at the end of 1H23, but the oil services company hopes that the cash it is generating from its operations will start to pay that position down rapidly. The company expects the second half of the year to perform in line with 1H23 and so uprated its earnings guidance to between USD96m and USD100m for the full year and has already been building its order book and expects 2024 to push past the USD100m barrier in terms of earnings, with expectations for 2024 earnings to be between USD125m and USD135m.

The company’s CEO, Jim Johnson said: “The North America drilling market is shifting activity to more oil-focused targets, which continues to provide opportunities to the group. Hunting Titan is shortly to launch the H-4 Perforating System, which will also provide revenue growth to the segment in 2H23, in addition to its good progress within international markets.”

Energy Transition Theme

Hunting does not want to be caught out by the acceleration of the Transition theme and has been exploring opportunities for its technologies in the renewable energy sector, specifically geothermal and carbon capture, which Johnson hoped would start to make material contributions to the company’s earnings in the short- to mid-term.

A significant piece of business that Hunting completed in the last year was the USD91m Oil Country Tubular Goods (OCTG) sale to Cairn Oil and Gas, Vedanta Limited, for its operations in Rajasthan, India in May. The contract was for around 100 wells over three years. This was Hunting’s biggest OCTG sale to date. A month later Hunting followed up the Cairn Oil deal with a 10-year strategic partnership with Zhejiang Jiuli Hi-Tech Metals Company for the supply of corrosion resistant alloys OCTG for carbon capture, utilisation and storage and geothermic applications.

Last month Hunting signed a five-year agreement with CRA-Tubulars, a specialist in carbon sequestration in North America to supply its Titanium Composite Tubing technology to Hunting in a collaboration project which will develop solutions for the upstream oil and gas industry to accelerate carbon dioxide sequestration projects around the globe. Hunting will allow CRA access to its own OCTG technologies.

Hunting’s return to profit

The company, whose clients include Exxon Mobil [NYSE:XOM] and Chevron [NYSE:CVX], saw increased client enquiries after Covid-19 restrictions eased up last year and more drilling projects were sanctioned or restarted resulting in return to profitability.

Hunting’s businesses are spread across the US onshore sector under the Hunting Titan subsidiary, the offshore industry grouped in the Subsea division, and a collection of businesses outside the oil and gas space.

The War in Ukraine was certainly a boon for Hunting. Having experienced historical growth post-conflict from the two major twentieth century wars fought in Europe, it has benefited from the first major war on European soil in the twenty-first century, as developed nations scrambled to find new fields to feed their oil addictions when Russian supply was cut off in 2022. But Hunting is also at an inflection point as the world transitions from a reliance on hydrocarbons and moves towards renewable and sustainable fuel sources.

The company was there at the beginning of the oil industry, was innovating at the start of the aviation industry, was involved with nuclear weapons after WWII and its pipes, fixings and tubes might well be essential in the transition story and O&G companies, and others are forced to find carbon sequestration solutions if they are to continue in business. Moreover, the growth in geothermal offers a new avenue for the company.

Whether the current leaders of Hunting are as innovative as its founders (27% of the business is still owned by the Hunting family, although they do not have any board or management positions) remains to be seen, but one wouldn’t bet against the company writing itself into another 150 years of history.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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