Oil prices have stormed from their multi-year lows of late April. From troughs below $20 per barrel, the Brent benchmark is now trading around the $32 mark. Easing lockdown restrictions across the globe have boosted prices, but the outlook for black gold values remains extremely murky.
It’s not just the crude producers that need to worry, of course. Suppliers of key oilfield services like Hunting (LSE: HTG) also find themselves in huge peril. But don’t just take my word for it: a report just released by the International Energy Agency reveals the weak profits picture for these engineers.
The body’s latest World Energy Investment report that’s just been released suggests that capex spend across the oil and gas sector will plunge 32% in 2020 to just above $250bn. Lockdown measures have hampered investment activity, sure. But this is not the main reason why spending is likely to tank, it says. Instead, “planned 2020 investments in upstream oil and gas have been slashed under pressure from the collapse in oil prices and demand”.
It’s a phenomenon that’s already delivering a body blow to small-cap Hunting and its peers. In mid-April, it advised that “the impact of the oil price decline has affected demand within the Group’s segments focused on US onshore completions since the end of March 2020.”
But this was not all. It added that “other segments are likely to see declines towards the end of quarter two, given that orders are continuing to be completed across all of [our] operating regions for a variety of offshore and international projects.” With work drying up, Hunting yanked its full-year guidance and pulled the dividend at the same time.
An oil play to avoid?
Glass-half-full investors might think that this is as bad as things will get for Hunting. Energy demand is likely to pick up again as lockdown measures are eased. And this should consequently drive oil prices and profits amongst crude producers higher again.
But I’m not convinced that values of the liquid commodity will continue to recover. Whilst off-take is indeed improving, supplies remain quite abundant and keep topping expectations. Latest data from the American Petroleum Institute showed US stockpiles up by 8.7m barrels when a 1.9m-barrel reduction had been tipped.
Investors need to consider how far oil prices can continue their recent recovery, given that the world is on the cusp of a painful (and possibly prolonged) economic downturn. The profits outlook for Hunting remains pretty murky not just for the near term.
City forecasts seem to be in agreement. They suggest that the small-cap will follow a 77% fall in annual profits in 2020 with a 27% drop next year. Investors need to be concerned about the state of Hunting’s balance sheet as well. In March it had just $22.3m of net cash on its books. This was down almost $100m from a year earlier.
The risks to Hunting are considerable. And yet it trades on a fatty forward P/E ratio above 20 times. I find it hard to envisage any reason why investors would want to buy today. I’d avoid it like the plague.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.