International energy services group Hunting (LSE:HTG) had a tough 2020. The pandemic created very challenging market conditions for the oil industry, and although things were picking up by the end of 2020, there’s still uncertainty around the industry. With whispers of a third wave circulating and a series of factors halting supply chains and suppressing demand, the road to recovery is fraught with difficulties. Will Hunting shareholders see a share price rise or is this a stock I should avoid?
Hunting’s financial outlook
Hunting manufactures hydrocarbon extraction tools. It provides the world’s leading oil and gas companies with premium products and associated services for sale or hire. It’s a global enterprise based in multiple locations.
In the past three months, the Hunting share price has risen 34%. Looking at the wider picture, it’s down 18% in five years. But at around £2.62 a share, it remains a far cry from its 2018 peak of £9.30 a share. So, at today’s price, with Covid-19 still hampering progress, does Hunting look like a good investment for me for the next five years?
Hunting has a £437m market cap, earnings per share are negative, and it offers shareholders a 2.4% dividend yield.
For Hunting, FY20 revenue came in at $626m, which was down from $960m in 2019. Earnings before interest, tax, depreciation, and amortisation (EBITDA) fell 81% from $139.7m in 2019 to $26.1m in 2020. Despite this, the group still felt confident enough to declare a final dividend.
What’s the long-term outlook for Hunting?
Hunting relies on industry capital expenditure to survive and with clients cutting their capex across the board, this led it to lose orders. But despite the dire backdrop, the company managed to show resilience. Its strong balance sheet shows it’s in better shape than some of its competitors and it ruthlessly cut jobs and distribution centres to make that happen.
In February 2020, Hunting bought Enpro Subsea, this helped it to increase its revenue from subsea products by 57% in FY20. Then last month, it invested $2.5m in drilling analytics company Well Data Labs. This gives the company a foothold in big data and analytics in drilling, which I think is a wise move in this tech-driven world.
The company has also been diversifying slightly with advanced manufacturing orders in aviation, space, defence, military, medical and geothermal. Elon Musk’s Space X and Jeff Bezos’s Blue Horizon have placed orders in the past year for aerospace related high-precision products. While its non-oil and gas revenue only account for 6% overall, these are big clients that could open doors.
Risk vs reward
Raw materials prices, such as steel, are rising, which means Hunting has to increase its prices to keep pace. Inflation is a concern if the companies are not bringing in enough revenue to cover the rising prices. However, the success of this industry correlates tightly with the price of oil, so if it strengthens, Hunting should thrive.
As I remain bullish on the long-term outlook for the oil industry, I’d happily buy shares in Hunting and hold for the next five years. It obviously comes with cyclical and external risks, and recovery could well be slow initially. But the world still needs oil, and Hunting is a company offering quality products in drilling and other vital sectors of the market. I also like the fact it’s happy to conduct share buybacks and protect the dividend, making shareholders a priority.
