This energy stock is hunting for growth

This means last year's lower prices didn’t dent the profits of companies such as Pioneer Natural Resources (US:PXD) and Chevron (US:CVX) as much as they could have done. On the other hand, those selling into the onshore US industry have faced a tougher environment. 

This has prompted companies to seek earnings growth elsewhere. Producers are funnelling investment into South America – Guyana is the standout – as well as the Middle East and Africa. 

The result is a hydrocarbon industry of two parts: lower US onshore and Saudi spending has been met by growth elsewhere. Consultancy Wood Mackenzie forecasts total capital expenditure for 2024 at just over $500bn (£394bn), a 2 per cent increase on last year. 

This is a good situation for Hunting (HTG), a company that manufactures, trades and rents out equipment for the energy industry. For a long time, Hunting was judged on the performance of its US onshore-serving business, Hunting Titan, which sells the perforating guns used in shale wells (these guns are typically three to four feet long and explode to fracture the shale after a well is drilled). This is understandable. These guns account for around 30 per cent of total sales, as of the first half of 2023.

However, the importance of the company's subsea units has grown as the market has changed in recent years. Hunting has flagged new opportunities in the Black Sea, for example, and offers similar exposure to state-owned energy companies as services giants such as John Wood Group (WG.) and Petrofac (PFC), but without the project risk. 

This shift in focus is driving revenue and profit growth. In a January trading update, Hunting said 2023 sales would be $925mn-$930mn, and that cash profit would reach $96mn-$100mn, double last year’s figure. “Trading in Q4 has been reasonably strong as activity across the global oil and gas industry continues to accelerate,” said Investec analyst Alex Smith. “Robust performance across the group, driven by international markets, offsets a minor slowdown in the North American onshore market.” 

Why now? 

Investec expects Hunting's sales to almost have doubled between 2021 and 2024. This is partly a reflection of recent weakness, but it is still encouraging that sales are approaching the highs of 2018 and 2019, when investment was strong in the shale industry. 

Titan sales have plateaued as active drilling sites in the US have fallen. Producers in the country are hesitant to put cash into new output because oil and gas supply has actually increased through cheaper methods in the past two years. The Baker Hughes rig count has fallen by a fifth in the past year, while total production has risen 8 per cent in the same period, to 13mn barrels of oil per day (bopd).

However, the group’s oil country tubular goods (OCTG) business, which provides the piping and casing used in hydrocarbon extractions, is thriving and is expected to help sales reach $2bn by 2030, as outlined in the September capital markets day. OCTG sales for 2023 climbed 53 per cent, to almost $400mn, so the momentum is already there. Advanced manufacturing also saw a 45 per cent uptick in sales last year to around $109mn, and subsea work was also "on fire" last year, according to chief executive Jim Johnson. 

The order book currently stands at a record $575mn, up 12 per cent from the third quarter of 2023 and up 21 per cent from the 2022 year-end.

Another push to increase sales will come from M&A, with Johnson keen to make one or two additions to the portfolio this year. This will be made easier by the zero net debt position as of 31 December. 

Profitability is also improving. Hunting typically lags the energy sector, and its Ebitda margin hit a post-oil boom (2011-14) high of 15 per cent in 2018, before going negative in the Covid years and then getting back to 6 per cent in 2022. The company has reported a 10.5 per cent margin for 2023, which should be confirmed in its full results at the end of next month. 

Management is aiming for a 14-16 per cent margin by 2025 and the forecast Ebitda margin for 2024 is 13 per cent.  

Johnson said this was a result of work already done in recent years. “We're focusing more on the technology, which makes the margins higher,” he said. “Plus when you look at the increase in the subsea business, that's some of the best margin business that we have, and that's growing faster than the rest of the businesses.” 

That shift to the more advanced products means lower-margin sales such as piping are not top of the priority list. “If you go back a couple of years and [compare] our pipe sales as a component of our total revenue in OCTG, it is actually smaller now,” Johnson added.

The 2024 outlook

Hunting has been pushing to diversify its revenue streams in other ways too. As well as serving the energy industry, it also provides parts to aerospace and space projects, such as Elon Musk’s SpaceX rockets, and green technologies such as geothermal and carbon capture. Around 8 per cent of 2023 sales came from non-oil and gas buyers.

Ultimately, however, it remains a cyclical stock that is heavily reliant on the energy sector. Much depends, therefore, on the near-term outlook.

Ian Thom, director of upstream research at Wood Mackenzie, is fairly optimistic, predicting that oil and gas investment will rise in the Middle East, but fall in the US.

“The new project pipeline remains healthy, with 45 projects vying to take final investment decision – a potential investment commitment of $170bn.” He added that many of these oil projects will focus on deep water, with the 10 biggest alone requiring $52bn of investment.  

Even in the shale world, there should be improvement on Titan’s “stable” performance. “If you're looking at 13mn barrels a day of production in the US alone... there's going to have to be a lot of drilling just to maintain production,” Johnson said on an investor call last week. Hunting is poised to serve that demand. 

For investors, therefore, the group looks significantly more attractive than it did in the recent past. It is more diverse and offers exposure to the broader energy sector, including state-owned players such as the Abu Dhabi National Oil Company and the China National Offshore Oil Corporation, as well as the US shale industry.

At the same time, its balance sheet is less encumbered than the services giants', which take on projects lasting years and run high levels of debt. 

The valuation is good for entry as well: Hunting's price/earnings ratio has halved in the past year, to under 10 times. This is a result of weaker shares and earnings forecasts climbing in the same period. Time to make the most of this discrepancy.