Even before the pandemic and oil price crash, US onshore production had struggled to be profitable and investors would have been smart to avoid that side of the sector. One exception in London has been Diversified Gas and Oil (DGOC), which buys up conventional and increasingly, unconventional, mature wells and wrings cash from them until they are dry, its scale and pipeline ownership meaning profits are easier to reach.
Hunting has not been so fortunate. It was already issuing profit warnings in late 2019 because of the slowdown in the shale sector, and we moved it to a sell recommendation at 438p in November 2019 . Any bearish call on an oil company was made to look inspired by the pandemic, but it now looks time for a speculative reversal.
Running through the 2020 results confirms the gamble this is: sales are down a third, earnings and operating profits turned into losses and profit before tax experienced a monumental $266m (£192m) drop.
But there is more to the company than those numbers. Hunting has avoided scrapping its dividend and is in a net cash position. This year, the oil and gas industry is expected to ramp up spending again thanks to the higher oil price, which hit $70 a barrel (bbl) earlier this month for the first time since January.
Consultancy Rystad Energy said this month offshore projects would boom in the coming years. “Offshore project commitments are expected to not only recover going forward, but their number is also set to reach a new record in the five-year period towards 2025, cumulatively almost 600 projects,” Rystad said.
This compares to 355 projects between 2016 and 2020 and equates to $480bn in greenfield spending.
Hunting chief executive Jim Johnson was more circumspect when talking to Investors’ Chronicle. He described 2021 as a “healing year” for the industry.
“Balance sheets have to be repaired where [exploration and production] clients are focused on returning cash to shareholders,” he said. “It all relates back to Covid and the oil price; if oil prices start with a seven you're going to see a quicker acceleration as a business.”
There are still questions over oil demand when air travel is still at extremely low levels and Opec could easily add millions of barrels of supply a day. These factors could see oil dip again as recovery realities set in.
But there are positives to find in Hunting even if the oil price falters again. The company made significant cost cuts in 2020 – $86m – and set itself up in recent years to benefit more from offshore spending, which is more stable than the US onshore sector.
The offshore operations – within the US and Europe, Middle East and Africa (EMEA) and Asia Pacific divisions – actually had some wins in 2020. Through the US division, subsea sales were up from $44m in 2019 to $70m. This is not organic growth: Hunting bought UK company Enpro Subsea last year and RTI Energy Systems in mid-2019. Asia Pacific, the third-largest division by sales, even managed an underlying operational profit increase in 2020, to $4.7m, from $4.4m in 2019.
Titan(ic) issues
Hunting needs an uptick in both offshore and onshore spending to really see earnings improve, however. It has long relied on the Hunting Titan business for the largest single share of sales and a large share of profits.
Titan sells perforating guns to onshore producers, which are used to pierce the well walls and allow production to begin. The latest Baker Hughes rig count shows the difficulties Hunting is facing in this market. The number of onshore rigs has fallen from over 1,000 two years ago to just over 400, as of 12 March, and Hunting said in its 2020 report that spending had declined from $113.4bn in 2019 to $49.4bn.
Hunting’s plan last year was to maintain market share by selling its perforating guns at a discount. This didn’t work, according to Barclays. “Titan’s market share in US$ terms fell to 26 per cent in [H2 2020], having hovered around the 33 per cent range for the past few years,” the broker said after Hunting released its 2020 results, also highlighting US peers’ December quarter revenue increase and price rises in the sector.
Titan did see an uptick at the end of last year, but Hunting pointed out this was from a low base.
Its sales for the year were down 57 per cent to $162m compared with the separate US division’s fall of one-fifth, to $292m. But even in this struggling division there is reason to be optimistic.
“Most onshore operations are even more economic at current prices, allowing for a vast group of operators, from large public companies to private players, to plan for incremental drilling activity increases in coming months as cash-flow generation expands and sets the stage for steady gains in the rig count,” said Rystad head of oil markets Bjornar Tonhaugen.
Drilling and completion budgets would be “relatively flat” compared with 2020, Tonhaugen added.
Johnson said Titan would remain a key part of Hunting, as part of a balanced portfolio of businesses. “The big focus acquisition-wise has been on the offshore segment for us, but we like onshore and offshore.”
Hunting has shifted its drilling tools business off the balance sheet, however, handing it to Rival Downhole Tools for 23.5 per cent of the company .
Johnson said drilling tools had needed capital spending of $40m over the past six years, and removing this was a “big structural change”.
Despite the weakness in its largest division, Hunting kept paying a dividend last year and offers plenty of upside in a stronger oil price environment. However, there seems little desire to reinvent the business as Johnson believes Hunting’s best bet is to focus on its core competencies. “I think it's a mistake to think that I'm going to start making windmills tomorrow or getting into some[thing] on the green energy side, or delving into something that we know totally nothing about,” he said.
The company does have some non-oil and gas exposed business – it does medical devices and some military manufacturing on a relatively small scale – but this is really a company to buy when oil is strong. While there are clearly some valid concerns about the long term, Hunting's enterprise value of 0.9 times next-12-month forecast sales looks low against a five-year average of 1.5 times prior to 2019. We think for an investor that wants some yield and strong upside prospects in exchange for the risk from oil prices, this could be a good time for a punt.
Last IC View: Sell, 141p, 15 Oct 2020
| Hunting (HTG) | | | | |
| ORD PRICE: | 279p | MARKET VALUE: | £460m | | |
| TOUCH: | 278-279p | 12-MONTH HIGH: | 297p | LOW: | 120p |
| FORWARD DIVIDEND YIELD: | 1.8% | FORWARD PE RATIO: | 429 | | |
| NET ASSET VALUE: | 594ȼ | NET CASH: | $57.5m | | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (ȼ)* | Dividend per share (ȼ) | |
| 2018 | 911 | 68 | 26.8 | 9.00 | |
| 2019 | 960 | 46 | 36.4 | 8.00 | |
| 2020 | 626 | -223 | -0.2 | 6.00 | |
| 2021* | 491 | -36 | -22.0 | 6.00 | |
| 2022* | 559 | 2 | 0.9 | 7.00 | |
| % change | +14 | - | - | +17 | |
| NMS: | |
| Beta: |
| *Barclays forecasts, adjusted EPS figures |
| £1=$1.39 |
