Overview
Hunting PLC (HTG) is a London, United Kingdom-based international energy services provider, which specialises in manufacturing, trading and renting high-quality upstream equipment for the wellbore. The history of the group goes back to 1890s when Charles Samuel Hunting entered the oil business to pursue exploration projects in Russia. He also sought trading opportunities out of the Gulf of Mexico, invested in a production venture in Hungary and built the first batch oil refinery on the Thames. During the 1960s and 70s, outside capital was brought into the business to fund expansion, and in 1989, different divisions were merged into the present Hunting PLC, and the company was taken public. Through expansion and acquisition, the group has become a leading upstream energy services company.

The group’s wide range of products and associated services spans assist in extracting hydrocarbons across the lifecycle of an oil and gas well, and its customers include national and international oil companies, major energy services groups and other key members of the energy supply chain. The company’s strategy is to be a key global provider of components and tools to companies through the development of its own technologies and proprietary know-how, positioning the company well to secure the market share. The group can defend margins and offer more operational flexibility through the barrier to entry for competitors enabled by the intellectual property portfolio owned by it.

Key Statistics



Management

Jay Glick is the Non-Executive Chairman of the group; he was appointed on 1 September 2017. Jim Johnson is the Chief Executive Officer of the company. He is supported by Peter Rose, who is the Finance Director.

Segments

The company’s operations are differentiated in five operating segments: Hunting Titan, US, Canada, Asia Pacific, Exploration and Production, and Europe, Middle East and Africa. Hunting Titan is primarily focused on onshore drilling and completion markets in the US and Canada. The US operations generate revenues from OCTG and Premium Connections, Advanced Manufacturing, Subsea, Drilling Tools and Intervention Tools product lines, while the main area of focus for most businesses in the segment is the domestic US market, which accounts for around 85% of external revenues. The Canadian external sales are almost exclusively to its domestic market and include an OCTG threading and accessories manufacturing and service facility. In the Asia Pacific, the group comprises of operating facilities across Singapore, Indonesia and China.

Top Shareholders

 
(Source: Thomson Reuters)

Trading Update (Q1 FY 2019)

In line with internal targets, for the first quarter of FY 2019, the company reported an underlying EBITDA of approximately $35.0 million. With the US onshore completions focused businesses remaining busy, the company reported a continuation of the level of revenues and profits reported in the last quarter of 2018. Moreover, segmental results improved and were reporting reduced losses in comparison to prior periods, driven by cost-saving measures established in earlier years within the international operating segments. Due to excess inventories built up in late 2018 because of increased competition, margins were reported to have reduced during Q1 2019. Price reductions of other products and inventory reduction of lower technology conventional perforating guns were targeted to address these market conditions. Given the market backdrop of an improved oil price, the company expects the outlook for the year to remain positive.

Key Financial Highlights (FY 2018, in $m)


 (Source: Company Filings)

During the year, operators were encouraged to increase drilling and production expenditure within the lower-cost shale basins as the average WTI crude oil price was approximately 30% higher in the year at $65 per barrel. Due to the strong business in the US onshore market, US segment revenue increased by 49% to $327.1m, supporting an increase in the group’s revenue of 26% to $911.4m.

Underlying gross profit rose by 57% to $275.1min the year with underlying gross margin improved to 30%, reflecting the increase in sales volumes and some price increases being implemented. Underlying profit from operations rose from $14.3m in FY 2017 to $104.7m in FY 2018, driven by the performance of the US and Hunting Titan segments. The underlying operating margin also rose to 11% from 2% in FY 2017.

The reported profit before tax, which accounts for charges for intangible asset amortisation and exceptional items, rose to $74.7m from a loss of $27.6m in FY 2017, while underlying profit before tax was $104.0m. The reported profit after tax was $85.7m, against a loss of $28.6m in FY 2017, while underlying profit after tax was $82.0m, versus $10.5m in FY 2017.

Reported diluted earnings per share was 52.3 cents(2017 – 16.0 cents loss) and underlying diluted earnings per share was 49.6 cents in the year 2018 (2017 – 8.0 cents). The final dividend of 5.0 cents per share was declared, which in addition to an interim dividend of 4.0 cents per share paid in October 2018, amounted to a total dividend of 9.0 cents per share for the year 2018 (2017 – nil).

Key Performance Indicators

Apart from Revenue, Underlying EBITDA (Loss), Underlying Profit (Loss) from Operations, Underlying Operating Margin and Underlying Diluted Earnings (Loss) Per Share, the company tracks other financial and operational key performance indicators. Capital Investment, which measures cash spend on tangible non-current assets, rose to $30.1m in 2018 from $11.4m in 2017. Inventory Days, which measures the efficiency of the company in maintaining its inventory judiciously, rose in FY 2018 to 185, signifying inefficient inventory management as compared to FY 2017. Return on Average Capital Employed rose sharply to 9% from just 1% a year ago. Free Cash Flow, the cash available with the company before transactions with shareholders and capital investment, rose substantially to $80.7m in FY18 from $49.3m in FY17. Net Cash (Debt) also rose to $61.3m.

Financial Ratios


(Source: Thomson Reuters)

The company’s profitability margins improved drastically in FY18 as compared to the last year. While the gross and EBITDA margin was lower than the industry median, an improvement was reported in 2018, and they are now inching towards the industry margin. The liquidity ratios were more than the industry’s and improved further during the year. The company has maintained a stable leverage position over the years, which has continuously been better than the industry. The company’s asset turnover ratio is more than the industry median, indicating better utilisation of resources.

Valuation Methodology
Method 1:EV/EBITDAMultiple Approach (NTM)
 
 

To compare HTG with its peers, EV/EBITDA multiple has been used. The peers are Subsea 7 SA(NTM EV/EBITDA was 5.51), TechnipFMC PLC(NTM EV/EBITDA was 6.29),Aker Solutions ASA(NTM EV/EBITDA was 6.33) and Vallourec S(NTM EV/EBITDA was 9.13) The mean of EV/EBITDA (NTM) of the company’s peers was 6.82x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)



To compare HTG with its peers, Price/Earnings multiple has been used. The peers are Vallourec SA(NTM Price/Earnings was -9.58), Petrofac Ltd(NTM Price/Earnings was 6.11), Aker Solutions ASA(NTM Price/Earnings was 13.27),TechnipFMC PLC(NTM Price/Earnings was 16.97), Saipem SpA(NTM Price/Earnings was 23.25), and Subsea 7 SA(NTM Price/Earnings was 35.86). The median of Price/Earnings (NTM) of the company’s peers was 15.12x (approx.).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

Share Price Commentary

Daily Chart as at June-19-19, before the market closed (Source: Thomson Reuters)

On 19 June 2019, at the time of writing (before the market closed, at 1:00 pm GMT), HTG shares were trading at GBX 516.5, up by 0.38 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 883.50/GBX 448.00. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 13.3x. The company's stock beta was 1.25,reflecting higher volatility as compared to the benchmark index. The outstanding market capitalisation was around £831.74 million, with a dividend yield of 1.35 per cent.

Growth Prospects and Risks Assessment

In current market conditions, pricing pressures is a feature of the current trading environment and supplying goods and services to oil and gas drilling companies remains highly competitive. As the supply and demand for energy is a key driver of demand for products, Hunting is exposed to the influence of oil and gas prices, and any adverse movements in commodity prices may heighten its exposure to the risks associated with shale drilling.

However, the company remains focused on the ability to respond to commodity price and geopolitical volatility. The recent trend in oil prices has supported the demand for the company’s products from increased production activity. The company is taking initiatives to improve margins and reduce costs. The company is slated to launch several new products and technologies in 2019, which would help in broadening the market reach. The proprietary know-how and substantial IP portfolio serve as an essential barrier to entry for competitors, allowing the company to protect margins.

Conclusion
Hunting remains well positioned to capture opportunities in the current market with a strong presence in upstream equipment and service markets, a healthy balance sheet and tightly managed cost base.
 
Based on the decent prospects and supported by valuation done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 514.50 (as on 18 June 2019) with high single-digit upside potential based on 6.82x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.) and 15.12x NTM Price/Earnings Value (approx.) on FY19E earnings per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on June-19-19).

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