The energy industry’s ongoing attempts to reverse underinvestment seen during the Covid years is a very welcome development for oilfield services (OFS) and engineering firms. Elevated natural gas and oil prices accompanied by a rise in energy transition projects in 2023 have seen their order books bounce back from the dark days of 2020-2021.
London-listed Hunting plc (LON:HTG) is no exception to this sector-wide reversal in fortune. Except that its boss has set about banking on the latest cyclical upswing to take his 150-year-old global engineering group to transformative business horizons it hasn’t explored to scale before.
“We believe in the power of precision engineering solutions that extend from subsea to space, and intend to make our presence felt across industries,” says Jim Johnson, Chief Executive Officer of Hunting.
Of course, the subsea bit needs no backstory – at least for those familiar with energy brands. Hunting’s three “core” business product segments, i.e., resource well construction, completion and intervention, and its Titan products suite, have plenty of global takers yet again.
On August 24, 2023, it announced an order book increase of 63% to $530 million for the first six months of the year, up from $326 million noted over the corresponding period last year. Gross profit came in at $114 million (up 51% year-over-year), and gross margin – a keenly watched service segment benchmark – rose to 24% from 23%.
But read between the figures and lines and you’ll see Johnson’s precision engineers have come a long way from Hunting’s decades-old OFS business origins in Oil Country Tubular Goods (OCTG) – namely casing, tubing, piping and pipelines – used for hydrocarbon extraction. Johnson’s statement says Hunting’s “medium-term growth strategy to 2030” is predicated on maintaining its “robust non-oil and gas revenue” supported by “strong energy market” takings.
Explaining the stance, Johnson notes: “Twenty years from now we’ll still be in the oilfield services business because we have a steady clientele and humanity will continue to use hydrocarbons in various forms as part of an evolving energy mix. However, our business transformation sees us offering mission critical products for a range of industries.”
The final frontier and precision engineering
For over two years, Hunting’s Maine, U.S., facility has been quietly plugging away at a slice of the industrial components market for space exploration – the final frontier. “It all began just over two years ago when a colleague did the sales 101 for space components and set about looking for business in earnest. His perseverance paid off and we find ourselves making parts of the landing gear for SpaceX missions and fuel storage for Blue Origin, although volume has been with the latter for the past six months or so.”
The company’s space sector experience has been widely similar to what it sees in the sphere of supplying mission critical components for subsea drilling, and medical infrastructure. “That once you are in and you prove your mettle, supply great cost competitive products – then it’s hard to be kicked out.
“From shafts for aircraft engines to parts for fuel tanks on rockets and stress joints on piping for deep water drilling – it’s all a trust and technology-based based business where we know the cost of failure is extremely high and simply not an option.
“It’s a place we have always been comfortable with as engineers and continue to demonstrate the strength of our mission critical product development capabilities. Incidentally, that’s also where our business margins are.”
Handling black swan events and their human cost
In February 2023, Johnson celebrated 35 years of being at Hunting having literally started on the shop floor and risen to the Chief Executive’s office as the decades rolled by. “I’ve seen more than my fair share of cyclical downturns in the business at Hunting. But Covid was a real black swan event! While downturn management was like crises past, the operational challenges were immense and nothing like what we’d faced before.
I would not let people work from home – for in our industry every employee is an essential employee. That meant we spent hundreds of thousands of dollars at many of our global locations, especially Houston, U.S., on sanitizers, Covid tests, segregating and moving workstations, and ensuring minimal shutdowns.
Then came the inevitable market clamor for job cuts. “But I had to keep my nerve. While we went from 3,000 employees down to 2,000 employees, I resisted the pressure cut more. Thankfully both – long-term investors as well as the board recognized that Hunting is nothing without its people, many of whom had done nothing wrong and didn’t deserve to be laid-off.
“Those who were let go were given support via severance packages we had in place before the pandemic and clearly told that they would be welcomed back when the market returns.”
In a vindication for Johnson and the Hunting board, over 400 have already been hired back in an improved operating climate. And the investors who kept faith were greeted with an interim dividend increase of 11% to 5.0 cents/share in August. “Covid also accelerated the very business transformations I mention; ones that had been on our minds since 2018. Ours is not a quarter-by-quarter business. It’s about the long-term and our employees are at the heart of it.”
Not impressed with the London Stock Exchange
F2or a company that’s going places, one of rare the things the Hunting Chief Executive is particularly miffed about is the company’s listing on the London Stock Exchange (LSE).
We have great IP, offer proven state-of-the-art precision engineering solutions, diverse in-house business and revenue streams – yet are really down to having no peers on the LSE. In an energy and OFS context, our shares trade in a domestic environment where a perception has been created that the public just hates oil and gas, which may or may not be true, but a section of the media takes it as gospel.”
“Consequently, I think we are automatically discounted for being listed in London versus the sort of valuation we could potentially achieve in New York. The political classes also appear to be bereft of a clear strategy and seem to be all in favor of overregulating businesses from taxation to the way share rewards are set-up.
“And not for a minute should this disappointment be about mine or any other CEO’s compensation. But the way things are structured in U.K. these days makes it so difficult for London-listed companies to have a progressive business stance. That applies to all industrial sectors not just us.”
Ultimately, it is for the LSE to press make the case, and for British politicians to make London as welcoming a place for public listings and businesses as Singapore or New York, and not him, Johnson says. “But they ought to be worried. I still think that ultimately it would be best for our investors if we were listed in New York.”
The inexorable direction of travel
Always one for acquisitions that “complement” Hunting’s core business, Johnson inked two deals – the takeovers of RTI Energy Systems and Enpro Subsea – just before Covid hit. But the company’s Aberdeen, U.K.-based OCTG business was sold while its manufacturing and assembly facilities in the Netherlands are being transferred to Dubai, United Arab Emirates.
Hunting’s existing Dubai operations will relocate to a larger facility to accommodate the manufacturing operations of the well testing business, which also positions it to capitalise on the strong market outlook for the Middle East in the long-term.
Apart from its regional distribution center, Johnson also says Hunting has commenced the closure of its Oklahoma City, U.S. operating site and will transfer manufacturing to its Pampa, U.S., and Monterrey, Mexico facilities, both of which have benefited from recent investment in new production capacity.
Hunting has also divested most of its legacy non-core exploration and production assets held by its wholly owned subsidiary Tenkay Resources. It has also entered into a joint venture (JV) agreement with Indian steel pipe maker Jindal SAW to set up a precision machine shop in India. Jindal SAW would hold 51% stake in the venture, while Hunting will own the remaining 49%.
For Johnson the moves are related to the inexorable direction of travel for Hunting’s business. “That’s eastward! The expansion in Dubai would put us in a very strong position in the Middle East. India is another growth opportunity, and we would be partners in the country’s drive to produce domestic precision equipment as a leverage of balance to reduce reliance on China.”
And in the next five years? “More of the same. We will continue to make more acquisitions, seek partnerships and business expansion for businesses that align with our ambitions and great quality intellectual property, especially around subsea, energy transition, non oil and gas high-end manufacturing, and of course traditional energy.