Hunting PLC (HTG) Earnings Call Transcript

Good morning, and welcome to the Hunting PLC Investor Presentation [Operator Instructions] Before we begin, I'd like to submit the following poll. And I'd now like to hand you to CEO, Jim Johnson. Good morning to you, sir.

Well, good morning, everybody. I appreciate you all taking the time this morning to come on this call, learn more about the company that I've been associated with for numerous decades here, and it's great to start off this conference with some good news about our full year trading statement that was just released this morning. So just kind of some highlights on that as I flick over to that. At the end of the day, we ended up having a very, very good year in 2024, it was much improved over '23. A lot of hard work from the team at Hunting and it was appropriate that in the past year, we celebrated our 150-year anniversary. And so it was good to make sure that, that was on a high note business-wise. I mean the key for the financials for the -- or just to talk about the company before I even get into that more, for those that don't know it is, Hunting has been in the oilfield service business since the late 1960s, where our business is global in nature. We have a number of product lines that are very focused on large portions of intellectual property. We have, first and foremost, an OCTG business, which for those that don't know what that is, that's really the tubing and the casing and the completion equipment that goes with the drilling and completion of an oil and gas well. That product line also has implications into energy transition with geothermal and with carbon capture. Our Titan business, our second major platform, is our perforating gun, perforating equipment business. It is one of the largest suppliers independently globally for perforating guns and explosives, primarily used for fracking wells but also associated with things like plug and abandonment work. Bulk of that business is North America focused with the shale plays dominating the use of those products, but it does have an international applications and basically offshore or anywhere in the world that oil and gas is being produced. Our Advanced Manufacturing business is an area that has a large portion of non-oil and gas to it. It is a high-precision machining business on one side and a high level of IP generated electronics business on the other. Both of those businesses are very unique, both of them have a large oil and gas footprint. But on the machining side, the bulk of the business is actually more aerospace and defense. So people like Elon Musk are clients of ours in the rocket business as well as companies like Pratt & Whitney and others in the defense side. And then lastly, one that has had the most exciting growth for us this year along with OCTG is our Subsea business. And it's one that we have built through acquisition, with 2 acquisitions in the last 4 years. Prior to that, we were in the Subsea business with one business unit that made proprietary couplings for subsea trees. So that was one of the first businesses subsea-wise that we participated in. It has had a very good year. But it's one of those areas also where we see a lot of growth and an area that we like and we'll focus on for future M&A opportunities because of the high level of IP associated with those type of product lines. But we made 2 acquisitions, as I mentioned, in the last 4 years. One of them was a company called RTI, which put us in the titanium stress joint business, which is very high-dollar, high-IP products primarily associated with FPSOs, which are floating production and storage units used in deepwater applications in areas like Guyana, Gulf of Mexico and others. And then the last portion of our Subsea business is our Enpro business, which makes numerous different kit to, let's call it, speed first oil and enhance the economics of subsea developments as well as provide some equipment for plug and abandonment work or abandonment work. So that's kind of a snapshot at Hunting as a general. The key is I'm proud of this organization. It's over 2,000 employees globally with a footprint basically where our customers are at and growing year after year. The trading statement, I'll flick over to that, just some topic on that. We're guiding, again, our final numbers will be out in March. But right now, EBITDA in the range of $123 million to $126 million, that's up over 20% year-over-year. EBITDA margins at 12%. Bruce Ferguson, the finance team and the rest of the team, great job generating cash, $100 million to $105 million in cash and bank at the end of the year. Sales order book of over $500 million, and I'll highlight that, that does not include any of our Titan business, which is the perforating business because the order book on that, it's a very short cycle business. Typically, we don't have visibility on more than a month out. But I'm pleased with our results and what we did, a lot of hard work by the team, and it really was another step in the direction from what we outlined in our Capital Markets Day. I go to the next slide. I think for investors that are just looking like, why would I buy shares in Hunting and what am I looking for? I think these graphs, all 4 of them, tell a really good story. If you look at it again, I like graphs from a positive point of view on revenue and margins and the like, lower left to upper right, and that's what you're seeing on all of these. So we came out of the depths of COVID where the industry had literally shut down. You've seen a strong rebound in our revenue growth, you've seen an improvement in our EBITDA performance. We continue to be big believers that shareholders need to see a return back in some measure, and we prefer that in dividends, and we intend to continue to focus on trying to increase that cash back to shareholders. And again, I had already talked earlier about the cash position. You would be hard pressed to find another energy-related company in the service sector with a better balance sheet than what we have right now. Next slide talks about our change in our revenue profile from offshore to onshore. You'll see that it's been pretty static that we are seeing more growth in the offshore business, primarily due to the acquisitions we've made and their impact in areas like Guyana and Brazil and deepwater Gulf of Mexico. The other slide beside it shows the breakdown, North America and rest of world. We're very focused on North America, and that's driven by the huge amount of business we're generating in the Titan product line, again, primarily for the shale plays in the U.S. and Canada. Revenue profile, strengthening OCT and Subsea sales. Those were really the 2 leaders going into '24 as far as market share or share of our business goes. OCTG, we really saw a lot of things come together in '24 through our investment in India, in that venture there, as well as pick up an opportunity in the Middle East and Southeast Asia and strong OCTG completion work in South America, primarily driven by Exxon in Guyana as well as a really good position in the onshore shale plays with our premium connections in North America. The key -- again, this next slide, China just goes into a snapshot, talks about things that I've already mentioned before, highlights the oil and gas, non-oil and gas side. Again, a lot of IP, we're not -- we like to stay away from commodity products. We like to focus on technology. And there's a lot of technology embedded in literally everything we do, whether it's the critical nature of our premium connections. One of the highlights we had in the past year that was noted in the press was the fact that some of our premium connections were used on the Anchor project with Chevron in the Gulf of Mexico, which was a 20,000 psi application. And again, working with people like Exxon in Guyana, it's just been -- it just validates our story that we have technology for this industry. Customer base, as you're seeing on this slide pretty much says it all. That's just a small fraction of the hundreds and hundreds of clients that we have globally, especially when you look at North America, there's lots of independent E&P operators or other service providers that we do business with. But we're proud to have all these companies on our list as customers. And some of these, I know, for example, the Chevrons and the Exxons and the Halliburtons and the like, they've been customers as long as I've worked for this company, which is over 30 years, and it continues. IP, I mentioned a little bit about earlier. And again, some of these, I'm not spending a whole lot of time on. But a lot of patents that we focus on, a lot of them in the Subsea side, in the premium connection side, in the Titan side. That's where most of that is driven from, from the patent point of view. IP, when you look at our Advanced Manufacturing in areas like our electronics business and our advanced machining business, there's a lot of embedded IP there that really separates us from our competitors in the crowd and is why people come to us for critical work being performed. The Hunting 2030 for some of you, I'm sure, remember when we did our Capital Markets Day, this just kind of outlines what we were wanting to do and it talks about revenue growth from where we were at, improving our EBITDA margins to 15%, generating 25% of our revenue by non-oil and gas by 2030, again, growing through M&A that we plan to do. We have a portion of our plans based on that, which leads me to just comment that I think 2025 will be an excellent year for the company on the M&A front, continuing to increase our dividend, as I mentioned earlier, it's important to us. We think that investors need to get a return, good times and bad. I'll remind people that it's never -- nothing's ever straight line and trees don't grow to the moon. But as you saw from the previous or earlier slides, our trends are going all in the right direction. I'm not going to go -- I hate reading Powerpoints directly, but it's all there in front of you, whether it's ESG focused, we continue to improve on our ESG scores and ratings. I tell people that we were very focused on ESG before most investors knew what it even stood for. So we've always been a company that has looked after our employees, our shareholders, the environment and try to be an excellent employer. So that pretty much sums up the Hunting 2030. And I'll just talk about some of the progress we made on this next slide. I had mentioned in OCTG, last year, we had record orders from Kuwait Oil Company. We have a joint venture in India with the people at Jindal, that venture is going very well. We received our API license here, I think it was late third quarter. So we're now tendering for opportunities in India. But it's our technology on the connection side married with pipe from the Jindal mill, and primarily all that product is staying in India. We have an investment with a company called Cumberland Additive based out of Austin, Texas. We own about 1/3 of that company equity-wise, but it's a focus on 3D printing, additive manufacturing. It's one of those businesses that we invested in, in order to gain more knowledge of that growing segment of manufacturing. We're seeing continued growth with our Cumberland investment. On perforating systems, we continue to focus on developing the latest and greatest technology out there that makes our clients, which they're primarily wireline customers who work for the E&P customers, more efficient. You read a lot about the E&P is doing more with less. And a lot of that comes down to the IP from companies like us that allows them to get quicker and faster at the well site, things like our H-4 Perforating System do that by reducing the chance of failures downhole as well as just, again, a quicker, more seamless operation for the wireline companies. Subsea, I talked about earlier, excellent business generated in the past year with Exxon in Guyana. They have standardized on our titanium stress joints for that market. We've added other clients in areas like the Black Sea with the Turkish national oil company as well as continued business in the Gulf of Mexico. I want to skip -- I mentioned earlier by Advanced Manufacturing. I'm going to talk a little bit about energy transition. We have picked up some geothermal work in the year. We've seen that business be a little slower than what we anticipated just due to the regulatory issues and how long it takes for projects to get moving forward. But one of the things we did do was really firm up our supply chain to supply into those markets with a relationship with the Jiuli mill, for example, in China, our investment in CRA-Tubulars for composite type products for geothermal and carbon capture. And then on another part of the energy transition has been the big success we've had in our organic oil recovery business, with $60 million of contracts secured in the period. Cost management remains a focus of the company. We went through some cost cutting last year at Titan. And today, we had a press release talking about further reductions going on in our EMEA business to rightsize things. KOC order, I won't spend a lot of time on. That order occurred last year, part of it was delivered in '24. Part of it will be -- the remaining of it will be delivered in '25. We're anticipating more business coming from just not Kuwait, but also the Middle East in the year ahead. So we're excited about our opportunities in that marketplace. Organic oil recovery, as I mentioned earlier, a good product that when you look at challenged areas such as the U.K. sector of the North Sea, where the government has been pretty anti-oil, you've got infrastructure in place, and you've got reserves still in the ground. And operators are continuing to challenge themselves on how are they going to get those resources out of the ground without putting more holes in the ground, while our organic oil recovery product is one of those solutions. And to date, we've had some really good testing as well as orders placed from operators, but not just in the North Sea, in the Middle East, in Malaysia, throughout the globe, and we're excited about the traction that we've gained in that product line. Energy transition, I mentioned a little bit about on a previous slide. This just highlights a couple of the other areas done. The CRA project is one where we think that due to the scarcity in a lot of the high nickel-based alloys in the world marketplace, when you look at the tonnages people are talking about, globally that they're going to have to have for carbon capture and for geothermal, there's going to have to be other materials used. And we think we're at the forefront of that with our partnership with CRA-Tubulars for composite materials. Geothermal, again, is one of the areas I'm most excited about over carbon capture just because a simple fact is Hunting has been a player in the geothermal market for 30 years. So if you looked at areas like the Philippines, Indonesia, Iceland, Southern California. We already have a track record of supplying products into those areas. And as that accelerates, we'll be -- we are well positioned to see that grow for us. New technologies, again, I've kind of jumped around on a few of these. The -- I've talked about the new H-4 gun at Titan. The TEC-LOCK product line continues to be one that continues to develop applications for now, for example, in things like the refrac market where different sizes are needed. But if a product line that our team in Houston -- engineering team in Houston has done just an amazing job on bringing these products to market quickly. We have our own testing facility in Houston, Texas that we spent in excess of $10 million on a few years ago, where we do a lot of our connection testing to customer specifications that allow us to participate in new business. Subsea, we talked about , again, we list some new technologies there in areas such as Enpro, which is the FAM product that it talks about on the bottom as well as different applications for our RTI business unit, which is the titanium stress joint-related opportunities. ESG, we are very focused on making sure we do things right. We take care of our people. We take care of our environment. And I think after 150 years, the one thing that's unique about Hunting is the fact that we are a company with a culture. So, so many businesses out there, you see are put together by private equity, this that and the other. I'm really thankful that I'm associated with this company. I spent most of my career here. I'm fortunate that the bulk of the team that I work with, as many of them have been here 10, 20 years, and that expertise is priceless when you look at the whole nature of the company and how we need to have customer relations, be agile in the marketplace and develop IP, it all comes down to people. So again, strong quality assurance, industry-leading, robust health, safety and environment. We take -- we go the extra mile to make sure we have nobody hurt, our people are safe. And again, compared to the industry standards, our results are very, very good. Again, some other things that talks about on -- this next slide just talks about our emissions ratings, our renewable energy purchases. I'm not going to spend a lot of time on that. Again, I think it shows we're doing the right things and working to make ourselves more efficient, save money. A lot of that with the emissions comes with the fact that we continue to -- while the number went up slightly, it didn't go -- it went up less than our growth in revenue on a year-on-year basis. So again, I think the traction is right and things are going in the right direction. Kind of just some topics about the industry. We're big believers that oil and gas is here to stay for a long, long time. I just don't think that renewables, while they're important and they will grow, the world cannot just run on renewables. So even in areas that we're not into that much, for example, nuclear, our Advanced Manufacturing business, we're a supplier of products to the nuclear industry. But I just think oil and gas is still going to be a driver in 2030. They're going to -- we're going to need more of it then than we do today. CapEx is always going to be a little rocky in this business. It's never a straight line, but the trend again is going all in the right direction, especially as you see more deepwater coming online because, again, 70% of the world is covered by water, and there's a lot of areas to explore out there. And while it's costly, I remember a study done just a few years ago, where Exxon came out and basically made a statement that, I think it was 7 or 8 subsea wells in Guyana equal the results of 1,400 shale wells in North Dakota as far as production goes and the volumes you get out of it. So a good trend, customers are going to continue to spend, and we're very happy to take the purchase orders. Market outlook, again, I mean, who knows what's going to happen in '28. We think it's going to continue to improve. We think 2025 is kind of a pause that refreshes, is what I'll say. We thought and we noticed that Q4 was kind of quiet in the industry. But what encourages us is the change of administration in the U.S., which I think is going to be very positive. You're also about to see a change in administration in Canada, which is another positive and just the world coming to the reality that you have to drill or you're going to be out of business and you're not going to have the hydrocarbons you need to support the growth in GDP and people's living standards around the world. The guidance that we've issued. There it is, you can all see it, EBITDA in that $135 million to $145 million -- or million range. Sorry, I'm looking at the EBITDA number in the 12% range. Tax rates are there. CapEx close to depreciation. The real thing is though this business is generating a lot of cash. We did in the past year. We will continue to do that. And I just think the outlook, when you look at our peers out there and what's happening, I think it's very positive. And I really believe that we're setting ourselves up for a boom in '26 as the regulatory environment clears up in the U.S. with the new administration and the like. The fact that natural gas is now at the $4 range in the U.S. LNG will continue to be an important product line. And internationally, there's lots of projects on the drawing board and in the development stages in places like West Africa, obviously, South America, Gulf of Mexico and the like. So in summary, '24 was -- I think our team did a great job. I think they performed exceedingly well. I think like every year, we had some winners and some losers. The real highlight in '24 was our OCTG business, our Subsea business, strong performance out of the U.S. assets. The problem is where the weaknesses we saw in our EMEA business, primarily in the North Sea, which is to be honest, is being driven by government policies in the U.K., which are not friendly to oil and gas. And again, a challenging year at Titan, though I think things will improve in '25, and I think we're on the right track there. The company has lots of liquidity. For me, one of the big stories for '25 is going to be on M&A. We're very focused on that. We have some things we're looking at pursuing now. But our goal is to make '25 the year where we spend some money and do some bolt-on acquisitions that strategically fit at a good price for both buyer and seller. And so with that, I am done with the presentation. I hope, again, like I say, the shares are on sale today. So it's time to buy, I really believe that the company is undervalued today. I think if you look at the multiple we're trading at, it's low. I think that we've demonstrated, we've managed well coming out of COVID. We've done the strategic moves we needed to take to make the company strong. And I'm just, again, thankful for the team that I work with. And I just think that better days are ahead.

Thanks very much for your presentation. [Operator Instructions] As you can see, we have received a number of questions throughout today's presentation. And at this point, if I could hand over to you, Ben to share the Q&A, that would be great, and I'll pick up from you at the end.

Thank you, Alessandro. So Jim, Bruce, the first question is from David. It says, what type of companies are you looking to acquire? And how will these acquisitions support growth?

So we've laid out kind of what we're looking for, a couple of different areas of growth within the company -- in the business. One of them is obviously continued to focus on the oil and gas business. We think there's opportunities especially in areas like Subsea, where we like the margin profile. We like the technology profile. So that's one of our top priorities. The second area of priority would be in non-oil and gas. That's an area that's been a little challenging because multiples have been a lot higher than what you've seen in the energy sector. And to date, we've had some tire kicking, I would say, but there hasn't been a lot of opportunities that have been present. And a lot of that comes down when I talked about '25 is the cycle of when buying can happen. So out of COVID, everybody had lower earnings. Most people were not prepared to be selling at that time, but that's why I think it's opening up now. So again, non-oil and gas with a focus on aerospace, defense and technology or subsea. Those are the 2 main areas.

Great. Got a few questions on the restructuring initiative that you announced today. One from Richard saying the restructuring aims to eliminate $10 million in costs. Are these cost reductions expected to fully materialize in 2025? And are there additional cost saving opportunities identified?

Well, we've been very diligent on focusing on cost. Last year was a lot of that was done on the Titan side. So when I look at the plan that we've laid out and the $10 million, it is primarily focused on our North Sea assets. We had agreements in place, as many of you might remember 3 years ago, we sold our pipe business in the U.K. So we had some commitments to service that client bought that business for 3 years. Those commitments ended December 31. And so now, we just need to fine tune the business for the size of the market that is there. Those cuts will be permanent. Obviously, it's not $10 million day 1, but the bulk of them will be in 2025.

Great. And Rebecca asked, how many staff do you currently have in the U.K.?

We have 150 staff in the U.K.

And then Nathan asked, as it relates to the restructuring, could that restructuring of the EMEA business result in a U.S. listing at some point?

No. That's not the focus on. The focus is to improve our overall performance. So the 2 are not related.

Okay. So we've got a question from Peter here. He says, with a robust tender pipeline, can you provide insight into the competitive landscape and how you position yourself to convert these opportunities?

Well, I think it comes down to IP, But I will say this that literally, I mean, every part of our business has competitive pressures out there. So there's things that we do, for example, in titanium stress joints. We're the only ones that make that product. So it's not that we would compete against another titanium stress joint supplier, but there are other applications that can do the same job that we don't feel they're as efficient. In areas like OCTG, it is a very competitive marketplace. It's hard to predict when you're going to have a win or success because we're competing against some of the best in the industry, like the Tenarises and the Vallourecs and the Sumitomos of the world. So it depends on qualification of your product. And we -- I mentioned earlier about our testing lab. We spend a lot of money doing premium connection testing, for example, to be on the bid list for the right sizes of casing that we want to. So I guess I can't give you a lot more clarity on that, except it's always competitive. There's always an opportunity, and customers always have another opportunity. But we believe that our strong strength in our IP and our people and our track record of excellent service to the clients is really what drives us to the value we give and we work hard to secure what we can.

Thanks, Jim. We've got another question on the same theme of competitive landscape, but as it relates to Titan. So in perforating systems, energy prices in North American rig count are very visible metrics. How is the competitive landscape and Titan's position within the industry evolved during 2024?

I think it's been pretty stable from a market share point of view. I mean depending on what month, we're either the largest or second largest supplier in North America. It has been one that there is a lot of competition. Pricing has not been strong in that marketplace in '24. It's stable. But right now, because of a rig count at 580, completion crews, frac spread counts down to 190, there's not a lot of pricing power today in that. But we anticipate the improvement in the natural gas market, which is one of the key areas for our Titan business historically is that, that is going to significantly improve in the year ahead, which will give us more opportunities and hopefully, better pricing point.