Hunting shares move higher as US orders flood in

Strong order intake, notably in the USA, higher-than-expected first quarter profits and the prospect of improved cash generation later in the year are all helping to boost shares in energy services and equipment expert Hunting. Oil and gas prices may be some way below the highs of 2022, but a renewed focus on supply and security is still leading to increased drilling activity both in the USA and worldwide, a trend that should benefit the FTSE 250 firm’s earnings and cashflow after a few lean years.

Hunting is not a pure play on oil and gas, since it also derives a portion of its revenues from the steel, aviation, medical, telecoms and space sectors, and the firm is also positioning itself as an energy transition specialist, notably in the field of carbon capture. Such diversification can at least help Hunting weather the vagaries of the oil industry’s spending cycles.

But the company supplies its metal tools, valves, joints and components to both oil companies and oil equipment giants such as Schlumberger, Baker Hughes and Halliburton, who then use or provide kit that facilitates the extraction of oil and gas from wells.

The US rig count is up 8% year-on-year to 748 and the worldwide figure is up 13% to 1,879, according to data from Baker Hughes. Even so, neither active rig figure is anywhere near their past highs, or the levels seen when oil last traded north of $80 a barrel.

Source: Refinitiv data, Baker Hughes

The globe’s oil majors – BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies – are starting to nudge up their capital expenditure budgets, after an extended period of austerity. Some of that could reflect increased investment in renewable projects but Hunting chief executive Jim Johnson is flagging a clear uptick in US business levels for the company.

Source: Company accounts for BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies, Marketscreener, consensus analysts’ forecasts

This will be very welcome after a lengthy slump in sales and profits, the latest leg of which came in 2020-21 when the oil price briefly slumped in response to covid and a sudden halt to global economic activity. Hunting made two consecutive annual losses in a row but broke that streak and was back into the black in 2022, as order intake began to pick up after a renewed surge in oil and gas prices.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

Analysts are pencilling in higher profits for 2023 and they will be encouraged by Mr Johnson’s confirmation in the trading update that Hunting expects to record an increase in earnings this year.

However, the earnings forecasts for 2023, 2024 and 2025 do not approach Hunting’s prior cyclical peaks, when pre-tax profit exceeded $100 million. Unlikely as such a recovery may seem right now given the global desire to move away from hydrocarbons, Russia’s invasion of Ukraine and higher energy bills could lead to short-term policy changes on Capitol Hill, in Westminster, Berlin and elsewhere that encourage rather than discourage their production (even if that move in favour of near-term energy security would frustrate, even enrage, environmental campaigners).

A return to anything like those peak-peak profit numbers could leave Hunting’s stock looking cheap, given the company’s market cap is some £400 million.

Earnings per share (EPS) exceeded 40p in 2012, 2013 and 2018 and they got close in 2006. If they ever get there again then the valuation could look tempting as that would equate to little more than six times earnings, based on a share price of 250p, and Hunting could catch the eye of some value seekers if EPS even gets back to half that level.

The shares may also come with a little downside protection, should oil and gas prices start to soften, the investment boom fail to materialise or wider sentiment toward equity markets continue to sour.

Hunting ended 2022 with a net cash pile and even if the first quarter has seen a cash outflow owing to working capital requirements as orders come in and projects start the company’s borrowings remain limited. Moreover, Hunting has net assets on its balance sheet of $845 million, or around £680 million at current exchange rates.

Even stripping out goodwill and other intangible assets ($191 million, or £154 million) still means that Hunting’s £400 million market capitalisation represents a fraction of book, or net asset value.

Apollo’s increased 240p-per-share bid for another oil and equipment services specialist Wood Group provides a further intriguing valuation benchmark.

Hunting and Wood are by no means identical, but Apollo’s latest approach implies an all-in purchase price, including debt of some £2.1 billion and a forward multiple of 6.0-6.5 times earnings before interest, tax, depreciation and amortisation (EBITDA).

Based on management’s guidance for $88 million in EBITDA for 2023, Hunting trades at a slight discount to that, on around 5.5 times EBITDA, a debt-adjusted basis. But it is even more telling that private equity is now stalking an industry which may be seeing increased spending by its big oil and gas customers after a prolonged period of austerity.

These articles are for information purposes only and are not a personal recommendation or advice.