Overview
Hunting PLC (HTG) is a London, United Kingdom-headquartered international energy services provider with a portfolio that is dedicated to the wellbore and a distinct ability to manufacture high tolerance products. The company specialises in manufacturing, trading and renting high-quality upstream equipment for the wellbore, which is developed using its technologies and proprietary know-how and protected by means of patents and trademarks. 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.

Its customers include national and international oil companies, major energy services groups and other key members of the energy supply chain, which are offered with high-end downhole metal tools and components required to extract hydrocarbons across the lifecycle of an oil and gas well, including well construction, completion and intervention stages. The company’s strategy is to be a key global provider of components and tools to companies through the substantial intellectual property portfolio, which acts a significant barrier to entry for competitors, positioning the company well to secure the market share. This also helps in offering more operational flexibility and enables it to defend margins, which is underlined by an attention to design, quality and service.

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, namely Hunting Titan, US, Canada, Asia Pacific, 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)

Recent Development

The company on 16 August 2019 announced the completion of the acquisition of the business and assets of RTI Energy Systems Inc. for a total cash consideration of $12.5m, which would provide the company with an enlarged product offering into the recovering deepwater offshore market and enhance the value proposition for the offshore oil and gas industry.

Financial Highlights (H1 2019, in $m)

                                
(Source: Company Filings)

As the Group’s US, EMEA and Asia Pacific segments all reported good year-on-year growth throughout H1 2019, revenue from operations for the six months ended 30 June 2019 increased by 15% to $508.9 million compared to the prior period (H1 2018 – $442.8 million), in line with the expectations of the management for the first half of 2019. As revenue increased, underlying and reported gross profit increased by 6% to $145.6 million in the period (H1 2018 – $137.3 million), although the cost of sales rose by around 18% to $363.3 million from $305.5 million in the prior year. Due to pricing on certain product lines and actions within Hunting Titan to reduce inventory levels, underlying and reported gross margin declined to 29% (H1 2018 – 31%). Reported EBITDA was recorded at $77.4 million (H1 2018 – $71.6 million), while on a like-for-like basis, EBITDA was in line with H1 2018, as underlying EBITDA was reported at $77.4 million, against $72.6 million in H1 2018, with EBITDA margin decreased to 15% (H1 2018 – 16%). The depreciation charge in the period was $20.1 million (H1 2018 – $17.7 million), while following the adoption of IFRS 16, the H1 2019 EBITDA benefited from a reduced operating lease charge of $4.6 million. The reported profit from operations was $41.1 million (H1 2018 – $38.9 million), while underlying profit from operations was $55.6 million (H1 2018 – $53.5 million). Reported profit before tax from operations was $40.1 million, and underlying profit before tax from operations was $54.6 million (H1 2018 – $52.6 million), as net finance expense remained flat at $1.0 million (H1 2018 – $0.9 million). Underlying profit for the period declined marginally to $41.3 million versus $41.7 million in H1 2018, while the statutory figure was reported at $30.4 million against $30.7 million in the prior year. Underlying diluted earnings per share was at 23.6 cents versus 25.0 cents, while reported diluted earnings per share declined to 17.3 cents (H1 2018 – 19.1 cents). Underlying basic earnings per share was reported at 24.6 cents against 26.1 cents in H1 2018, while reported basic earnings per share decreased to 18.0 cents versus 19.9 cents in H1 2018. Amounting to an estimated cash distribution of $8.3 million (H1 2018 – $6.6 million), the company declared an interim dividend of 5.0 cents per share (H1 2018 – 4.0 cents). Principally due to reduced absorption of working capital in H1 2019, free cash flow increased by $37.9 million from $22.1 million in H1 2018 to $60.0 million in H1 2019, while net cash was $33.4 million at 30 June 2019 (31 December 2018 – $61.3 million net cash), which includes $47.1 million of lease liabilities recognised following the adoption of IFRS 16 lease accounting.

Segmental Analysis

 
(Source: Company Filings)

As sales in North America declined and a decrease in the total volume of energetics shaped charges sold was recorded, Hunting Titan reported revenues of $206.1 million in the period (H1 2018 – $216.7 million), which is 5% lower than the prior period. Reported profit from operations was $29.3 million (H1 2018 – $46.2 million) and due to price reductions within certain product lines to retain market share, underlying profit from operations reduced to $42.2 million (H1 2018 – $59.2 million).

Reflecting an increase in the sales of measurement tools, subsea products, and premium and semi-premium connections, US segment reported a 23% increase in revenue in the period to $181.1 million (H1 2018 – $147.3 million). Reported profit from operations was $11.3 million (H1 2018 – $1.6 million) and underlying profit from operations was $12.9 million (H1 2018 – $3.2 million).

Canada segment revenue was $19.5 million in the period (H1 2018 – $21.7 million), which was 10% lower compared to the prior period, reflecting challenging market conditions and general operating environment, though the company retained its key accounts. The reported and underlying loss from operations increased to $3.0 million, against a loss of $1.1 million in the prior year.

As international markets continued to improve throughout the reporting period, the Europe, Middle East and Africa (EMEA) segment reported a 19% increase in revenue to $67.0 million (H1 2018 – $56.1 million). Compared to a $6.8 million loss in the prior period, underlying and reported profit from operations was $0.2 million during H1 2019, as the group returned to a break-even position.

The Asia Pacific segment reported a 47% increase in revenue in the period to $75.1 million (H1 2018 – $51.2 million), driven by new activity within the customer base due to general increase in the oil price across most of 2018 and during Q1 2019. Underlying and reported profit from operations was $3.3 million in the first half of 2019, against a loss of $1.0 million in the previous year.

Financial Ratios

 
(Source: Thomson Reuters)

The company reported an impressive growth over the past couple of years, and its profitability margins are now better than the industry median, though declined over the last year. However, the liquidity position improved over the previous year and was significantly better than the industry. Moreover, the company was significantly less leveraged than its peers, with a debt/equity ratio at 0.05x, against the industry median of 0.76x. While the asset turnover has improved over the years, it was lower than the industry, but the company has been gradually closing the gap.

Valuation Methodology
Method 1:EV/EBITDA Multiple Approach (NTM)



To compare HTG with its peers, EV/EBITDA multiple has been used. The peers are Petrofac Ltd(NTM EV/EBITDA was 4.76), Subsea 7 SA(NTM EV/EBITDA was 4.79), Saipem SpA(NTM EV/EBITDA was 5.21),John Wood Group PLC(NTM EV/EBITDA was 5.91) and Aker Solutions ASA(NTM EV/EBITDA was 5.91) The mean of EV/EBITDA (NTM) of the company’s peers was 5.32x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)



To compare HTG with its peers, Price/Earnings multiple has been used. The peers are Petrofac Ltd(NTM Price/Earnings was 6.59), John Wood Group PLC(NTM Price/Earnings was 8.18),Aker Solutions ASA(NTM Price/Earnings was 14.39), TechnipFMC PLC(NTM Price/Earnings was 15.32), and Saipem SpA(NTM Price/Earnings was 18.65). The mean of Price/Earnings (NTM) of the company’s peers was 12.62x (approx.).

Share Price Commentary


Daily Chart as at 16-October-19, before the market closed (Source: Thomson Reuters)

On 16 October 2019, at the time of writing (before the market closed, at 10:40 am GMT), HTG shares were trading at GBX 394, down by 4.13 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 748.50/GBX 389.80 (latest low level as at October 16, 2019). The company's stock beta was 1.29,reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £676.47 million, with a dividend yield of 1.97 per cent.
 

Growth Prospects and Risks Assessment

The company anticipates international growth in the second half and continues to retain market leadership within the US onshore market, supported by the introduction and development of new products for clients during the reporting period.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. However, the company reported that the near-term outlook remained uncertain,given the instability of the market backdrop, and the onshore market remained highly competitive. As clients restrict expenditures to within current cash flows and budgets, the group anticipates a slowing in the pace of activity within the US onshore drilling market. Moreover, in current market conditions, pricing pressures are a feature of the current trading environment and the groupis 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.

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. In the last four years, its gross profit has risen at a CAGR of 5.64%, and it has consistently reported decent financials.
 
Based on the decent prospects and supported by valuation done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 389.80 (as on 16 October 2019, before the market closed) with high single-digit upside potential based on 5.32x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.) and 12.62x NTM Price/Earnings Value (approx.) on FY19E earnings per share (approx.).
 
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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