Hunting a bargain

Hunting's share price slide means that it is currently trading 15 per cent below its 12-month high, but importantly it remains above its key 720p support level. More tellingly, according to Bloomberg consensus forecasts for the next 12 months, Hunting's shares, which over the last two years have commanded a PE rating premium to the peer group of almost 30 per cent, now trade on par with rivals. Meanwhile, its enterprise-value-to-operating profit ratio is at a relatively meagre 6 per cent premium to the peer group, compared with a historic average of 21 per cent. Move now and you'll also be getting in below Hunting's 50-day and 200-day moving averages of 833p and 842p, respectively.

Of course, Hunting's share price isn't likely to recover if problems linked to reduced rig activity in Canada and excess inventories in the US persist, but there are indications (including Baker Hughes stats) that activity has picked up appreciably in US shale production and in the Gulf of Mexico, so group revenues are likely to be weighted heavily towards the second half. A recent interim management statement pointed to improved conditions since July compared to the first half of the year, but a number of the group's businesses continue to report mixed trading. The report prompted Goldman Sachs to reduce its target price to £10.60 from £11.00, contributing to recent share price weakness.

Nevertheless, recent research from HSBC suggests that the importance of 'rig count' as a lead indicator in North America's oil equipment & services sector is becoming less relevant due to the preponderance of horizontal drilling and the expansion of hydraulic fracturing, while Deutsche Bank maintains that "structural growth drivers of Hunting's business beyond the rig count remain underestimated". These areas of the industry are well served by Hunting's proprietary technologies, particularly in light of the $775m (£484m) acquisition of Titan Group in 2011.

The Titan deal added perforating gun systems for fracturing shale rock and other hardware used in unconventional oil & gas production, all of which were complementary to Hunting's existing drilling technologies. Hunting's experienced management team, headed by Texan Dennis Proctor, were quick to spot the industry swing towards horizontal drilling, and have positioned the group to exploit it through a number of strategic bolt-on acquisitions, although net debt has been kept at manageable levels.

Prior to the acquisition, Titan laid claim to a 30 per cent market share of its segment within the domestic shale industry, and while two-thirds of group production still takes place in the US, Hunting is increasingly looking eastwards to drive future growth. A new distribution centre for its products was opened up in Jakarta during the first half of this year, while manufacturing capability for some of its drilling hardware has been established in China. Management has one eye on the potential growth of shale oil production in the People's Republic, which can arguably lay claim to the third biggest reserves in the world. Development of the industry has been hampered by a lack of expertise. But there are now high hopes after US major Hess Corp signed a landmark shale deal with PetroChina in July. It's conceivable that demand for Hunting's hardware could expand rapidly if China's incipient shale industry even partially replicates the roll-out in the US - time will tell.