- Run of consecutive profit upgrades ended by a warning
- Lower natural gas prices and weaker US drilling activity take toll
- Order backlog starts to drop
- Company continues to develop new revenue streams to reduce reliance on hydrocarbons
“Lower oil and natural gas prices are curtailing drilling activity in the USA, where hydrocarbon producers may also be keeping a close eye on the result of the presidential election, and as a result oil equipment and services specialist Hunting is starting to see a slowdown at its American operations,” say AJ Bell investment director Russ Mould. “The order backlog has shrunk, despite a healthy order intake in the Middle East for piping products used in drilling and exploration work, leading to chief executive Jim Johnson announcing a reduction in earnings expectations for 2024.
“Worldwide rig activity is starting to stall again as oil prices shrug off the war in Ukraine and ongoing conflict in the Middle East, thanks in part to reduced demand growth forecasts from OPEC and assurances from the International Energy Agency that supply remains plentiful due to higher Libyan output and OPEC’s scope to increase production as and when it chooses to do so.
Source: LSEG Refinitiv data, Baker Hughes
“The spike in natural gas prices caused by Russia’s attack on Ukraine is now a distant memory and increased US shale output, and higher supply of LNG from Qatar and the Middle East, are taking the heat out of this market, as US drillers hang back on new exploration and production work.
Source: LSEG Refinitiv data, Baker Hughes
“As a result, Hunting’s backlog is now $652 million. This is up from $565 million at the end of 2023 but down from $700 million at the end of June.
Source: Company accounts
“As a result of the reduced visibility and slowdown in order intake, Hunting’s golden run of four consecutive profit forecast upgrades is ending. Boss Jim Johnson now believes that, on the basis of its preferred profit metric of earnings before interest, taxes, depreciation and amortisation (EBITDA), profits will come in between $123 million and $126 million for 2024.
“That may be higher than the $103 million recorded in 2023 but is lower than the $134 million to $138 million range laid out alongside the second-quarter trading update back in July. It also questions whether the forecast for EBITDA for 2025 of between $160 million and $175 million is still attainable.
Source: Company accounts, management guidance for 2024E
“This stumble may prompt investors to wonder whether this is a longer-term trend toward lower oil and gas prices, as the globe seeks to move to a net-zero world, or simply a blip. Those who are inclined to believe the former are unlikely to rush to buy Hunting stock any time soon. Those who believe the latter and take the view that hydrocarbons may be with us for a lot longer than anticipated, could still feel Hunting offers long-term value.
“The $625 million stock market valuation still represents just 0.8 times the value of the company’s tangible assets, which include $707 million in equipment and working capital. That still provides patient owners of the shares with a degree of downside protection, as does a balance sheet that carries very little debt and where improved cash collection in major Middle Eastern contracts will provide a further buffer.
“In addition, this is a company where earnings per share (EPS) exceeded 40p in 2012, 2013 and 2018. They also got close to that level in 2006. If they ever get there again then Hunting’s shares will look cheap, although there is the risk in the short term that profit warnings can come in clumps and it may take a fresh increase in the order backlog for investors to contemplate a return to anything like past peaks in earnings.”
