Earlier this year we reviewed the revived prospects for the oil services industry which was showing signs of life as the oil price rebounded from its lows during the Covid period.
At the time we concluded that UK services player, Hunting plc LON:HTG, looked like the best placed business to profit from the rising tide. This week (15th December), Hunting released it’s year-end trading update for 2022, confirming that the business is in good shape after a busy year.
Prospects also look equally bright for Hunting next year, as the company lifted 2023 EBITDA guidance by USD5 to USD10m and announced a new division to unlock potential in the low carbon energy market. Here we look at the results, and wider market sentiment for the sector to examine whether owning Hunting into 2023 makes sense.
Picks and shovels
Hunting is a business engaged in the manufacture, trade and rental of upstream equipment for boring and maintaining oil wells. In a market that has faced significant headwinds in the last few years, 2022 could be coined the comeback year for the energy industry, with a return to prior levels of drilling activity, and a buoyant oil price, which spent much of the year above USD100 per barrel.
In such a fertile market, it isn’t hard to see how Hunting has delivered a significant swing in profitability for 2022, delivering EBITDA of USD50m up from USD3.1m the year prior and USD26m in 2020. Whilst the company did not disclose revenue figures in the update, analysts expect sales of USD364m in the second half, resulting in USD700m in revenue for 2022, up 34% from 2021. Hunting noted in the trading update that the group’s balance sheet remains strong, with net assets at 30th November 2022 of around USD847m.
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During the update, the company remarked on its “year of rebuilding” where through a combination of strong enquiry levels and product launches, the group has attracted an order book approaching USD500m, with the majority to be recognised in 2023, providing a reassuring outlook for Hunting. Next year also looks to be positive in terms of product development, as Hunting’s Titan subsidiary is to launch the H-4 perforating system, a self-orientating system that improves the accuracy of oil well completions to markets in the US and Canada.
Hunting pursuing low carbon opportunities
Whilst Hunting currently operates within the fossil fuel sector, a large, sustainable market exists for the company to provide technical engineering services to the renewable energy industry. In Hunting’s latest update, the board announced the formation of a new ‘Energy Transition global sales group’ to pursue green energy opportunities.
Hunting has so far earmarked opportunities in the geothermal and carbon capture space, which are rising in popularity. Hunting hopes to use its expertise in connection fittings, pipe supplies, couplings and valves to find solutions for this adjacent market.
Oil Capex
Oil prices have slipped from highs seen earlier this year, largely due to fears of recession resulting in lower forecasts for oil consumption in the 2023-4 period. Despite this, prices remain elevated compared to recent years and the jury is still out on whether China’s reopening will result in a surge in demand for the black gold.
Source: Baker Hughes
Whilst strong oil prices are clearly good for Hunting, the oil services firm generates revenue from the capital expenditure of oil companies and requires oil firms to spend on well development to be in business. Pictured above, the U.S rig count from Baker Hughes shows that drilling activity has nearly got back to pre 2020 levels in Hunting’s largest market, however rig counts are still a long way away from levels seen in 2015.
Shale gas
Some of the drilling activity lost from the offshore boom period of 2009-2015 was replaced by innovations made in shale extraction, however in the period since 2015, the oil market has remained in a situation of structural undersupply. Such a situation of prolonged under investment in CAPEX certainly looks positive for the fundamentals of the oil services industry going forwards.
Source: Hunting H1 Investor presentation
Such structural undersupply hasn’t gone unnoticed in the investment world. In an interesting pivot from former strategy, quality growth fund Blue Whale announced its interest in the oil sector after years of non-ownership, through a recent interview for their five-year anniversary.
Interviewer: “let’s talk a little bit about energy then, again this is another one of those things that you know six months ago 12 months ago the idea of how having anything energy related in a fund that’s labelled as growth would have seemed ridiculous or a lot of people.”
Stephen Yiu [fund manager, Blue Whale]: “Something has changed in terms of dynamics [in the oil market] which we think in the next five years, given what happened recently in Europe… and our relationship with Russia or even maybe China in the next five years, is not like we are not going back to those like good old days. I think if you look at the geopolitics between the U.S and Saudi Arabia, I think that [relationship] has changed.”
Yiu: “Shale Gas many years ago was a disrupter, I think now it is understood that it is no longer a disruptor given that the depletion rate is very high, and then and then you look at the under investment in terms of the supply constraint in the next five years seems to be quite supportive.”
Hunting opened trading on 16th December at 290p. The oil services company has offered a year-to-date return of 79.4% and a one-year return of 109.3% with shares ranging between 146p and 356.5p over a 52-week period, giving the company a market cap of GBP486.6m.
Summary and valuation
With a confident outlook set for 2023, Hunting looks to defy any gloom cast over the global economy by impending recession fears. The company looks to be in a much healthier position, exiting 2023 with a small net cash position and a robust order book, which will underpin Hunting’s growth prospects as the oil market looks to recover further.
With a surge in earnings expected from a return to profitability, Hunting trades on a forward P/E ratio of 20x expected earnings in 2023. Years of underinvestment by oil explores in CAPEX should continue to provide a buoyant environment for Hunting, and a new venture into clean energy solutions could yield longer term results for the company.
