Hydrocarbon Reliance Will Constrain Margins But Transition Will Provide Relief

Key Takeaways

• Heavy reliance on oil and gas exposes Hunting to volatility, while accelerated renewables adoption threatens long-term demand for its core offerings.
  
• Expansion into energy transition and technology investments support growth, but challenges in scaling non-oil business and rising competition may pressure margins and returns.
  
• Hunting's heavy reliance on hydrocarbons, slow diversification, operational margin pressure, and rising regulatory and ESG risks threaten long-term profitability and growth amid the global energy transition.

Catalysts

Manufactures components, technology systems, and precision parts worldwide.

• While Hunting stands to benefit from the continued long-term reliance on hydrocarbons and rising energy demand in emerging markets-potentially driving higher revenues from its OCTG and subsea businesses-its heavy dependence on oil and gas capital expenditure still exposes it to significant earnings and margin volatility during market downturns or commodity price shocks.
  
• Although government emphasis on energy security and supply diversification could boost investment in domestic and unconventional resources, thereby expanding Hunting's addressable markets and order book, accelerated global progress on renewables and decarbonization initiatives threatens to erode demand for Hunting's core offerings over the coming decade, impacting future revenue growth.
  
• The company's ongoing pivot toward energy transition segments like geothermal and carbon capture may serve as a long-term growth engine and support baseline revenues, but its current non-oil and gas sales remain modest, raising concerns around its ability to scale up quickly enough to offset structural declines in traditional oil and gas segments.
  
• While substantial investment in proprietary, high-margin technologies and a strengthening balance sheet support the potential for margin expansion and acquisition-led growth, intensifying competition from larger, more diversified oilfield service providers and the risk of falling behind in digitalization or automation could put sustained pressure on net margins and return on capital.
  
• Despite robust order momentum in international and offshore markets-evidenced by large contracts in Kuwait, India, and South America-a shift in upstream project sanctioning toward shorter-cycle or lower-carbon projects could dampen the long-term visibility of Hunting's revenue pipeline and constrain adjusted EPS growth if not successfully counterbalanced.

Hunting Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hunting compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hunting's revenue will decrease by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.7% today to 8.0% in 3 years time.
• The bearish analysts expect earnings to reach $80.8 million (and earnings per share of $0.5) by about July 2028, up from $-28.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, up from -23.7x today. This future PE is greater than the current PE for the GB Energy Services industry at 8.3x.
• Analysts expect the number of shares outstanding to decline by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

Hunting Future Earnings Per Share Growth

Risks

• Hunting remains highly dependent on global oil and gas capital expenditure, making it vulnerable to long-term demand reductions as the global energy transition accelerates and governments and corporates pivot to renewables and lower-carbon solutions, which could negatively impact revenues and growth as fossil fuel markets structurally contract.
  
• The company's diversification into non-oil and gas revenue streams, such as geothermal and carbon capture, is still nascent; with energy transition revenue just under $15 million and organic oil recovery revenues only beginning to scale, the limited current contribution suggests ongoing reliance on hydrocarbons that exposes Hunting to earnings volatility and future margin compression as energy markets evolve.
  
• Margin pressure persists in specific segments such as perforating systems and EMEA operations, where EBITDA margins have been negative or low, prompting repeated restructurings and a significant $109 million impairment in the Titan business, indicating long-term risks to net margins and bottom-line profitability if these segments fail to recover or if cost-cutting options are exhausted.
  
• Despite recent growth, Hunting faces competitive risks from industry consolidation and advanced digitalization, as increasing automation and requirements for technologically advanced, high-efficiency solutions could necessitate significant capital investment-potentially straining free cash flow and eroding its competitive edge against larger or more agile service providers.
  
• Regulatory, geopolitical, and ESG-related risks are likely to intensify, bringing stricter environmental standards and potentially restricting access to capital for oilfield service providers like Hunting, raising compliance costs and exposing the business to shifts in investor sentiment that could depress valuations and shareholder returns over time.

Valuation

• The assumed bearish price target for Hunting is £3.45, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hunting's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.04, and the most bearish reporting a price target of just £3.45.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $80.8 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of £3.14, the bearish analyst price target of £3.45 is 9.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.