MIDAS SHARE TIPS: Can fracking bring you a deep well of profit? Hunting sells to the oil industry and it could pay off
Jim Johnson is an oil man, through and through. Based in Texas, Johnson has been in the industry for 40 years, the past 27 of them with Hunting, where he stepped up to the chief executive position in 2017.
Hunting makes specialist tools and components that play a critical role in the construction of wells and the extraction of oil and gas from them. The stock was trading at more than £8 last summer but it has since fallen to £5.79, hit by concerns about the oil price, the energy sector more generally and the global economic outlook.
The fall has been overdone and Hunting should bounce back.
Oil boom: Hunting's specialist tools and components are in demand worldwide
Johnson takes a long-term perspective. He knows the oil market is cyclical but he is determined to establish Hunting as a business capable of delivering sustainable returns to shareholders. And he is optimistic about the future.
Today, around 70 per cent of Hunting's profits come from its Titan division, whose products help shale developers to bring oil and gas from deep underground to the surface.
The business has ridden the US fracking wave, soaring to new heights, when shale exploration and production exploded, only to suffer, when oil prices tumbled and shale firms were forced to retrench.
Oil prices are still far lower than five years ago, but shale survivors are probably stronger and more mature than they were back then. Initially focused on expansion at almost any price, they are now more conservative, concentrating on projects that actually make money.
Fortunately, they still need Hunting's products, particularly high-tech tools that allow customers to drill more efficiently and cost-effectively than ever before. A state-of-the-art perforating gun, for example, can be used by less skilled operators, a particular advantage when labour costs are rising and specialists are in short supply.
Back in December, Johnson expressed caution about 2019 but sentiment has been better than expected recently and activity is picking up slowly.
Interest in fracking is gaining ground outside the US too, in places such as Argentina and even Saudi Arabia – and Hunting's kit is among the best in the business.
Titan has been the focus of investor attention in recent years but Hunting has other strings to its bow, making essential equipment for on- and off-shore explorers and producers. Products range from complex measuring poles used when wells are being drilled, to steel cases, tubes and locks for building and operating deep wells.
Offshore activity has been subdued recently but it is coming out of hibernation, from Latin America to South East Asia, and Hunting is a prime supplier.
Across the oil and gas industry too, companies have been sitting on their heels but equipment now needs to be replaced and upgraded, boding well for firms such as Hunting.
Over time too, the company is likely to benefit as emerging markets become wealthier and demand for oil and gas increases.
Hunting releases results later this month and analysts expect a rebound in profits from just $11 million (£8.5 million) in 2017 to $100 million last year, with robust growth thereafter.
The company resumed dividend payments in 2018 too and a 12 cent (9.3p) payout is forecast, increasing to 17 cents in 2019. The company reports in dollars, as oil is traded in the US currency, but UK investors receive dividends in sterling.
Midas verdict: The oil market is cyclical and few participants can escape the highs and lows. But Hunting shares have fallen too far too fast and they are now undervalued. Johnson has also undertaken several self-help measures that should boost resilience in the future. Buy.
Traded on: Main market Ticker: HTG Contact: huntingplc.com or 020 7321 0123
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