Hunting PLC - Investor Presentation with Q&A (11 January 2024)

Welcome everybody to our webinar today. Thanks for taking time out of your busy schedules. We hit the ground running quickly here early in the year because a couple things: one is we're excited about the results that we had in 2023, and so our trading statement is out, it's very positive. We'll go over some more details on that. And being the New Year, it's always good for investors to have new ideas and new thoughts to think about starting out right early. In the States we would have called it a January weight sale, so prices are, we're on sale right now. Share prices we think very undervalued based on the fundamentals of our business, and we're going to try to highlight some of that to you today. And for those that don't know, Hunting the company's history has always been about being a premier supplier to various industries around the globe, whether it's defense and aviation, but primarily it's been oil and gas. And this year we have the fortunate milestone in front of us of celebrating the 150-year anniversary of the company, so we're excited about that. Our goal is for Bruce and myself and the rest of the team to carry that tradition on into many, many more decades to come, and we think we're well positioned for markets today and markets that will be valuable to us in the future. The company again, I can't stress enough the fact that what we focus on, we are not a commodity supplier of products. So what we make and sell in the marketplaces are extremely mission critical, they are life and death related products when you're talking about aerospace and even some of our oil and gas, and they are used in some of the most critical environments globally in any industry, whether it's in space because we supply products now for people like Elon Musk and for Blue Horizon in the rocket business, to aerospace where we make components for people like Pratt and Whitney, to offshore markets where our products are used in water depths of 5,000 feet and going 30,000 feet below ground, having to face the challenges of severe temperature and pressure. So today we're fortunate with results that we have been able to generate. It has been an extreme challenge for the company coming out of COVID, however today I think we're probably better positioned than the company's been positioned in more than a decade. We've reduced our exposure to some lower margin products and we're trying to focus on enhancing our margins as we continue to evolve the business. One of the things that we did, we hadn't done one of these in years, but we did a capital markets day back in September. There's a lot of data presentation wise out there to go through in a lot of detail of our products and what are really our goals and aspirations are for the company from here to the year 2030. As I go to slide number three, I'm going to briefly talk about the different product lines. I realize there's a lot of people that aren't totally familiar with all the ins and outs of the energy business or especially on what we do, so I'm going to try to give you some information on that, and there'll be a time for questions if you want to ask.

So one of the key areas we look at, our oil and gas business, one of the key parts of business is our perforating business. It was a company called Titan that we purchased over a decade ago, and we are a market leader in technology and in products to provide the explosives and the perforating guns. The explosives go in for the fracking of unconventional resources, and these are also used in conventional wells also, but the volumes and the masses of these products has really taken off in the past decade due to the expansion of the shell plays in oil and natural gas primarily in North America. So we are one of the few people in the world that not only do we manufacture the guns, but we have patents and technology on the switching that ignites the guns, and we actually manufacture the explosives that go in them. So these guns are typically three feet long, four feet long, have numerous charges around, and after the well is drilled, the guns go into the ground through the casing and tubing and they're exploded to fracture the shell, which allows the production to take hold.

Our next area we talk about briefly is subsea. It's one of the fastest growing parts of the company and it is one of the ones that has the most international exposure. That business unit is broken down into three segments. One of them is based outside of Houston, Texas, and it was the original subsea business that we acquired many, many years ago, but we make components and couplings that go on subsea trees. So in that business, for example, our largest client is FMC and those people that are manufacturing subsea trees. A second business that we acquired three years ago, which was kind of the acquisition of the century for us, we bought a company called RTI Energy Services, and that company specializes in making titanium risers. These risers are what hang off of a floating production vessel in deep water operations and acts as a conduit for the production of oil and gas to the storage unit. These products are typically, if you can imagine, it's a titanium joint of pipe that is 30 to 40 feet long. I don't know what they actually weigh, but I can tell you we sell them for about three and a half million dollars a piece. There's a lot of IP in them as far as the connection design as well as the metallurgy and in the welding that goes on with this. This was a product line that was basically in hibernation from the previous owner who was not an oil and gas service company. We saw an opportunity, we made this acquisition a couple years ago, it's been a home run for us, and we've been able to crystallize that big time in 2023 with a great outlook for 24. The business itself is generating good results for us, and our key client that we landed has been Exxon for business both in Brazil as well as in Guyana. So the Guyana business has just been massive for us and should continue to go from strength to strength. And then recently we announced in our trading statement our first orders in the Black Sea region, and that was with a company called TPAO out of Turkey.

Next is OCTG. When you look at Hunting's history in oil field services, which dates back to the late 1960s and the first development of hydrocarbons in the UK continental shelf, we were an OCTG focused company. So today we have evolved over the time period in many different areas globally. At certain times we sold pipe, but what we always did was focus on the connections that go on this pipe, which is the technology and the IP that differentiates us from some of our other competitors. So in this business, we are in the pipe, the tubing, the casing market worldwide. In North America we do not stock or hold the pipe, we let distributors do that, hence our inventory risk is nil and our margin enhancement is much better because we don't have the carry costs for that pipe. Internationally, we actually buy the pipe, put our connections on, and sell to international markets, but we're not in the inventory stocking business. So it's a quotation, manufacture, deliver to client, and so there's no real inventory risk. Our big markets are in Southeast Asia for that group as well as the Middle East, and it's a business that has further upside coming to it in 24 thanks to the benefits of our Jindal joint venture in India, which will make us a commanding supplier in the Indian market for OCTG.

Energy transition is one that's got a lot of talk over the last couple years obviously as people look at their ESG credentials. For Hunting, our real focus on this energy transition is in the modification and use of our existing OCTG platform. I remind people that Hunting has been involved, for example, in the geothermal market for more than 25 years. We've supplied our products, OCTG related, in markets from Iceland to the Philippines to Indonesia to Southern California. So today we're seeing a resurgence in demand for tubulars and kit for geothermal, and we're excited that we have been a player there and we will continue to be in the future. The second part of that energy transition as it relates to the OCTG segment is carbon capture. Right now that whole industry is in early stages, but we have great technology that is going to be utilized in these wells. What the engineers are finding out is you have to put a lot more thought, process, and engineering design into carbon capture because of things like cryogenic effects on the tubulars, because you're taking basically frozen CO2 injecting it into the ground. The integrity of the well is increasingly more challenging to maintain, and that's where we see our product line fitting in well.

Lastly, in non-oil and gas, and it has an oil and gas exposure, but we are very proud of our advanced manufacturing business units. It consists of two operations: one in the US in Maine outside of Portland, where we are probably the premier machining operation in North America for high precision manufactured components. As I mentioned earlier, we make components that go on aircraft, we make components there that go on spaceships, defense business, submarines. There's also a portion of that business that does supply the oil and gas industry, manufacturing tools for people like Halliburton and Baker used for the very demanding MWD and LWD kit that goes in the ground to be drilling wells and logging those wells. With the manufacturing facility in Maine, there's another facility in Houston, Texas that is the premier supplier of harsh environment electronics. Those electronics are primarily used in the oil field where they have to withstand extremely high temperatures from being downhole as well as the shock issues related to drilling. We've been fortunate in the last couple years to take the expertise and move it into areas like medical and some defense recently in 2024. So that kind of lays out our business. All the same theme should play through: it's high engineering, it's not commodity businesses, and it's those that we see a lot of growth in going forward. In the next slide, I'm going to pass it off to Bruce to talk about our trading update.

So how did we do this and what are some other points to highlight with the systems? If you look in this slide on page five here, you know, perforating systems as we talked about, one of the big upsides was really the growth we saw in the international marketplace. We introduced some new products as well, our H4 gun which allows for some self-orientating action when clients want to be more precise in their fracking. But overall, from a challenging market point of view, we had a 20% decline in the US rig count, I think the decline was even greater than that in Canada, so the performance for the business I think was very, very good. We anticipate going forward that onshore US will probably be a kind of a quiet first quarter. We're still waiting for budget information from some of our clients, but we are hearing that, or we do feel in our hearing, that by the second half of the year drilling activity and completion activity will pick up. Because a key point to remember is with a massive amount of production coming out of North America, if you're looking at 13 million barrels a day of production in the US alone, the treadmill on that, since the bulk of that or a large part of that is shell related, there's going to have to be a lot of drilling just to maintain production. So we're pretty confident we're going to have a good year in perforating. The international sales should continue to expand as the world needs more of these hydrocarbons and these basins become more mature. Argentina is a big growth area for us. We're seeing Saudi Arabia, believe it or not, has a large unconventional play that they're buying equipment for perforating. And then there's new markets like Australia where people are now setting up ventures to kind of mimic what's been going on in the Permian Basin.

On subsea, as we mentioned, it's just been a stellar year. The team has done a super job of reestablishing a product line that was kind of abandoned, but with Exxon now on board, we continue to do business with people like Shell in the Gulf of Mexico. The new orders in the Black Sea, we see continued upside with that as the world continues to reinvest in the offshore marketplace, both in the Gulf of Mexico as well as internationally in deep water. So keep in mind, for the titanium riser business, that is purely a deep water operation, so you won't see that in a jackup operation or onshore.

OCTG, the big highlight I think going there, the big upside there in 24 is the real growth in our joint venture in India with the Jindal people. Again, we've got a strong order book already starting there. The facility is world class, great people there, we have a great partner. And if we have enough excess of pipe, it also provides us another channel of material in our supply chain to go into markets like the Middle East. We expect that the US, North American, Canadian OCTG business to be stable, and the OCTG related products going into areas like especially Guyana should continue to be strong, and that was a big upside part of our backlog today and part of the great performance we had last year.

Energy transition, what we've tried to do there is make sure our supply chain is secure. Early this year we've gotten some first orders on geothermal in the Philippines, but our relationship with a mill in China called Jiyue is very important to our growth in this marketplace. Because in a lot of these areas like geothermal and like carbon capture, traditional OCTG tubulars cannot be used because they cannot withstand the temperatures, either cryogenically cold or in the high-end hot. There's a limited amount of mills in the world that manufacture these higher nickel-based tubulars. Jiyue is one of the premier suppliers, so we're happy to be working with them. We've already supplied product in Brazil with the Jiyue mill and see a big upside there. C-Tubulars is kind of a technology spin for us where we're looking at things like composite materials for some of the cryogenic issues related to carbon capture.

Advanced manufacturing, we see good growth. I mean, on the defense side, let's just be honest, the world's going to continue to spend a lot of money on defense over the next decade for events that have happened now in preparing the world to be secure in the future. Aerospace, you all know what the backlogs are for Airbus and Boeing, and yes, we do not have any parts on a Boeing 737 900 series Max if I get that question, but we have a good marketplace there. It highlights the importance of the products that Hunting makes in the advanced manufacturing side.

So to get through these slides and give you time for questions, we'll go to slide number six to talk about 2030, why we laid that out and what do we think and what are the main points. Point number one is I hope I was able to get across in a few minutes the compelling products that we bring to the marketplace. We're not a commodity player. In some areas like titanium stress joints, we have 100% of that market because nobody else makes one. Not that there's not other solutions, but for that solution which is proving out to be highly economical to clients, there is no place else to go. And we have a lot of other products that again, one of the key themes is focusing on IP. Our engineers do a great job of keeping our products world class or at least growing new opportunities with clients with new product lines. Strong market fundamentals, we're all bullish on the energy business. I just don't see oil demand falling. There's projections and we believe it, we're going to head towards 110 million barrels a day of oil demand in the next few years. Natural gas is going to become increasingly important as a clean source replacing coal, and we have to use the same Hunting products in an oil well as you do a natural gas well. So from the energy side, we're big believers, there's lots of upside. And that doesn't minimize the upside with geothermal and carbon capture, it just complements the whole package for us. Revenue growth we've projected that in 2030. One of our key focuses is obviously to improve our EBITDA margins, get them back to 15%. That's going to happen through better product mix, better pricing, and higher utilization of our facilities. And in slide number four, we talk about the cash flow projections by 2030. One of the things we didn't talk about is we also want to maintain and grow our dividends to our clients. We believe that giving something back to our shareholders on a consistent basis matters and it shows the strength of our balance sheet and the strength of our business. So with that, I think I'm ready to turn it over to questions. Thank you very much.

And fascinating run through. Let's move on. Lots of questions. You were just talking about EBITDA margin, Jim, and but maybe it's one for you, Bruce. The question is from which product groups or indeed regions do you expect to see the most important contributors in terms of moving that margin up from 10 and a half percent to the 15% implied levels?

Great, thank you very much. We've got a question: how much in percentage terms of your revenues comes from non-oil and gas at the moment and where do you think you can move it to over the next three to five years?

Right, right now the revenue mix we're about 8-9% non-oil and gas. Our goal is by 2030 to be at 25% non-oil and gas. That will include the energy transition portion of the business as well as new product lines and things we bring on board, and the contribution from the growth in medical, defense, and aviation from our AMG business.

Okay, and similar question is regarding defense that we've just been talking about. What proportion of revenues comes from that segment relative to the whole group, and can you just list one or two examples of the products and services you provide if they're not restricted?

Okay, now going back to oil and gas. Recent comments on the company have noted that the North American rig count stabilized, indeed slightly improved towards the end of 23. It sounded like you had a reasonably positive view for the rest of 2024, Jim. If you could expand on that a little bit more. And perhaps for you, Bruce, there's also the question: typically how long does it take for additional drilling to actually drop through to Hunting's bottom line?

So on North America, think we're going to have a slower first quarter. I think for some of our clients, budgets haven't even been established yet or set out. I think the real driver is going to be the fact that if you look at a depletion rate as large as they are, they probably have to replace about a million and a half barrels a day of production just to keep being flat year over year, let alone if there's any new growth. The second part of it is I really think we're going to see a demand call on natural gas starting in the second half of the year, probably Q4, because of the need for orders to be filled for LNG. So we've got more LNG capacity online. I mean, just this morning it was announced that Chesapeake and Southwest are merging, creating a $24 billion company, and the focus is there. The upside they're talking about for natural gas is being able to be a bigger marketer in the international field. So those are the two drivers. Another one that's probably going to be for us is Canada. It had a declining year last year, but we're hearing a lot of good things from clients about gas needs in the Canadian market as well as continued work on heavy oil.

Carbon capture, as you said Jim, it's still at an early stage. But what is a reasonable time scale that you might expect for meaningful revenues to start coming out of that area, and what sort of partners or sectors are you focused on?

I really think it's going to be a 2025 story. I think this year is going to be one of getting regulations in place that will allow pipelines to get established, getting permitting done. I think it's a testing phase. We're actually in one of our labs right now working on some testing related to the cryogenic issues on connections. So I'm not expecting a whole lot this year, but going forward it's something that is real, it is happening. People like Exxon and Occidental have spent a lot of money on this, but it's just more of the governmental issues getting it moving.

Okay. Was there us? Now in terms of that very impressive projected free cash flow number, perhaps one for you, Bruce. Can you outline how you might look as a management team at allocating that substantial free cash flow between investment in the business organically, dividends, and potential M&A?

Okay, understood. And if M&A, I'm sure M&A opportunities are constantly addressed, but what sort of criteria, either financial or other factors, do you apply to opportunities that you're looking at?

Okay, very sensible. And related to that, is it fair to assume that these are more likely to be bolt-on transactions rather than anything transformational?

You mentioned the success of Exxon in offshore Guyana. We have a question that apparently there is some territorial dispute going on in the region. Has this heightened any risk to operations offshore?

From what we know today, there hasn't been any change in Exxon's operations there. I mean, obviously if the Venezuelan military marches over the border, that's going to be a bad day for everybody there, but we just don't see that as being something that's going to happen. But you never know.

Indeed. Returning to slightly more stable grounds, we have a question: how is oil production in the USA held up so well at a time of the last couple of years when there's been a declining rig count? It's been great fracking perforating guns from Hunting supplied in the field that have enhanced production. No, I'm just being a little funny there, but no, these guys are a lot smarter now in how they have engineered these wells. So I saw documents yet in the last week or so, excuse me, that the average oil company in the US increased the volume of hydrocarbons per foot by 3% year over year. So the productivity is better. They understand seriously the way they do focus on things like the explosive capabilities of our guns to enhance that production. So those things are going on, plus they're drilling longer wells, so you have less time moving rigs, more time on hole, lateral lengths are being extended, and that's how they've been able to get the production up.

Makes sense.

A couple of structural questions. The possibility of a dual listing for your shares was mentioned at some stage last year. Is that still under review, or is there a potential time horizon for that?

Yeah, it's not going to be a 24 issue. I think one of our aspirations is for something like that to happen. I think that we get a discount by being in London, and I think as brand UK comes better back into place, we're hoping that changes. But at the end of the day, we don't want to alienate our shareholder base here in Europe and in the UK, and we really think we've got to have more scale size-wise, and we hopefully will as the business continues to improve. But I just don't think that's a story for today. But there's no doubt we're a very big rarity in the UK. So if you want to play onshore oil field services, I really think we're about the only game in town. Whereas in Houston, Texas, I've got all my peers are there. It's just a different marketplace. Better to be a big fish in a small pool.

Yeah. And Bruce, we were talking about potential uses for free cash flow. We have a question: have you considered deploying excess capital to fund share repurchases at the current juncture?

Great, thank you. We're bouncing around a bit. Energy transition clearly important segment. The question is: is that coordinated at board and group level in pursuing opportunities, or is it more progressed at the product group and local regional level within the group?

I say the answer's both. The board is focused on us expanding into, making our energy transition happen. We actually appointed a senior person to head up our energy transition work, a fellow by the name of Shaun O'Shea, who has many years of experience, he's an engineer with the company. So we have enhanced the exposure to that and worked on developing our teams to focus on that. So it's kind of an all-in-one type approach.

Okay, thank you. And just a couple more. You mentioned that subsea has been performing extremely well. There is a much smaller business listed in the UK called Ashtead Technology, and one viewer is curious whether you come into competition in the services that they provide.

Good, that's a nice simple answer. And last question, and we'll finish with you, Bruce. What level of capital investment is likely to be required to deliver that 2030 roadmap?

Great. Well, I think we're done. Thank you very much to the audience for a very wide range of questions. We will be sending around a feedback form to the people who have watched this presentation, and the company is of course very interested in your views, so please fill that out. In terms of more material, we've mentioned there's a lot on the Hunting investor relations web page that you should see, and of course Equity Development has written on the trading update that has just come out to follow up a detailed initiation note a couple of months ago, and Toby Thoring, the analyst, has a fair value of 407 pence per share. And lastly, most importantly, thank you very much, Jim and Bruce, for a very good presentation. We wish you all the best and look forward to seeing you at the release of the full year results at the end of that.

All right, thanks Andy. Appreciate you and your audience this time.