Hunting PLC (HTG), the international energy services group, in its Q1 2019 trading update, said that the already competitive sector could see more consolidation in future. Jim Johnson, Chief Executive of the group, said that increased competition in the first quarter led to a decrease in margins despite a continuation of the level of revenues and profits reported in Q4 2018. Earnings for the period were reported to be in line with the expectations. The company’s underlying EBITDA in the period stood at approximately $35.0 million.
The company reported that the margins for its largest segment “Hunting Titan” declined due to enhanced competition. Though revenues in the quarter were reported to be ahead of Q4 2018, margins have reduced during Q1 2019. As the industry worked through excess inventories built up in late 2018, the increased competition was reported during the period. Jim Johnson remarked that there are probably way too many companies operating in the sector and there is "never a lack of competition."
The company has implemented measures to address this concern, including scaling down the inventory of lower technology conventional perforating guns and a slight decrease in the price of other products. However, as market share has been maintained, the company does not expect these initiatives to feature in the financial year 2019. Moreover, new technology and products, including the new H-2 short length perforating system, is expected to continue to be introduced. The new technology has been well received by clients so far. Further, the capacity expansion programmes undertaken by the company remains on schedule, with competition expected to be completed by the end of the first half of the current year. This expansion would provide the group more efficient manufacturing on a reduced cost base.
These remarks by Mr Johnson came on the heels of similar acquisition by Chevron Corporation, one of the world's leading integrated energy companies, of Anadarko Petroleum Corporation. Johnson added that the whole sector could benefit from such consolidation. He did not disclose specific details about any potential deal but said the company was open to bolt-on deals and looks forward to having discussions with people over the matter. He also said that as most companies had questionable debt loads and still had no earnings, placing a value on such companies would be difficult. Moreover, the companies that only operate in the Permian Basin are not in Hunting's radar.
After peaking in October last year, oil prices have dropped sharply since then. However, as the US has imposed sanctions on exports from Iran and Venezuela, markets have tightened this year. Tightening of the market has been further supported by cuts in supply by the Organization of the Petroleum Exporting Countries (OPEC). However, Johnson noted that Hunting was not able to demand higher prices in the first quarter despite the pick-up in crude prices, as there was room to increase prices. He said that companies would feel a need to expand their inventory and buying it would be the best way to do it. According to him, the industry will experience more mergers than acquisition, with the majority of transactions between mid-sized companies.
Share Price Commentary
Daily Chart as at April-17-19, before the market closed (Source: Thomson Reuters)
On 17th April 2019, at the time of writing (before the market closed, GMT 2:20 pm), HTG shares were trading at GBX 638.50, down by 1.84 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 934.50/GBX 448.00. The company’s stock beta was 1.21, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation stood at around GBP 1.06 bn with a dividend yield of 1.06%.
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