Shale slowdown stalks Hunting

While production volumes are still high, the lower prices and financial weakness of the smaller players across the Texan Permian and Appalachian basins has seen a gloom descend over the industry. The expected increase in the dominance of oil majors also represents an added threat to the pricing power of oil services companies such as Hunting.

US research firm Goehring & Rozencwajg said in a report this month that the shale growth trend had slowed considerably. “After growing by a torrid 145,000 barrels per day (bopd) per month in 2018, shale production growth has ground to a near-halt,” the report said. “Since December [2018], shale oil production has grown by only 50,000 bopd per month – a collapse of almost 65 per cent versus 2018’s phenomenal rates.” 

Hunting is split into the Hunting Titan business and four international divisions dominated by the US. The biggest contributions to revenue and earnings come from Titan, which is the most exposed to onshore unconventional projects. It accounted for nearly 40 per cent of Hunting’s revenue in the first half of 2019 and three-quarters of underlying operating profit.

At the end of October, Hunting said its full-year cash profit (Ebitda) would be at the “lower end of market expectations” because of the shale slowdown while also flagging volatile market conditions. Broker downgrades followed, continuing a recent trend that we think has scope to continue. Indeed, Hunting is particularly vulnerable due to high fixed costs, which makes profits very sensitive to falling sales (so-called 'operational gearing'). Risks are also increased by the huge amount of working capital tied up in Hunting's operations. Working capital stood at a heady $459m (£358m) at the half-year stage. This includes large amount of both inventory needing buyers (38 per cent of 2018 sales) and money owed by customers (receivables were 25 per cent of sales).

The half-year contribution from the international divisions was much improved, with a  $5.7m operating loss turning into a $13.4m profit. Most of the profit was from the US with a $3.5m profit from businesses in Europe, Middle East and Africa (EMEA) and Asia Pacific, offsetting a $3m loss from Canada. The improved international performance helped temper the impact of a 29 per cent decline in Titan's first-half operating profit to $42m.

In the company's third quarter to the end of September, as well as the ongoing strains at Titan, Hunting reported stable trading in the US, lower operating losses in Canada, but also losses for EMEA and Asia Pacific, with the latter suffering from trade tension-hit spending.