Interactive Investor

Insider: betting on a FTSE 250 bargain and FTSE 100 growth play

1st May 2023 11:13

by Graeme Evans from interactive investor

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Directors have been digging deep, first to back a recovery at this mid-cap energy firm, then a six-figure purchase at a blue-chip undergoing a transformation.

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Under-pressure Hunting (LSE:HTG) shares have received boardroom backing in a week when lower oil prices fuelled worries over the demand outlook at the US-focused well services firm.

Wednesday’s purchase by finance director Bruce Ferguson was made a few days after the FTSE 250 company reported first-quarter earnings ahead of management expectations.

Ferguson, who spent £34,300 on shares at a price of 228.67p, knows the company well having held senior financial and operational positions at Hunting since 1994. The shares closed on Friday at 234p, a level 30% lower than before annual results in early March.

The valuation weakness comes amid fears that a slowing US economy and falling oil price will make conditions less attractive for energy firms to begin new onshore and offshore projects. WTI crude futures dipped to $75 a barrel on Friday, having fallen 9% in a fortnight.

Hunting’s operations include the 2011 acquisition Titan, whose perforating guns, energetics and instrumentation tools are used in the shale oil Permian Basin region of West Texas.

A separate North America division, which operates mainly from Texas and Louisiana, manufactures products including subsea valves and pressure control equipment.

Chief executive Jim Johnson told the AGM on 19 April that the month of March had been particularly strong, with the company’s North America division the driving force for a “strong” order book of about $500 million (£398 million).

However, he also reported that Titan faced a marginally lower US onshore rig count since the year-end. This compares with 2022’s 53% increase to an average of 705 active units.

In last month’s annual report, Johnson told investors that demand for Titan’s products continued to grow steadily as basins in the US are increasingly regarded as strategically important in providing secure oil and gas production. Prospects generally have also been boosted by the demand outlook as China re-opens after Covid.

Johnson added that industry forecasts for an average oil price this year of between $75 to $100 per barrel were a range that will support new activity in all basins globally.

He said last month: “Overall, the short to medium term market outlook remains strongly positive given the economic fundamentals driving the global demand for oil and gas.”

However, London and Houston-based Hunting is working to build greater resilience to the cyclicality of the oil and gas industry by targeting other sectors where it can leverage its expertise in precision engineered products.

The company’s 2030 strategy, which it plans to detail in a presentation to City investors in September, includes an ambition for a long-term earnings margin target of 15% and to grow the dividend by an average 10% a year until the end of this decade.

Hunting is due to pay a final dividend of 4.5 cents (3.61p) a share on 12 May, part of a 13% increase in 2022’s total to nine cents a share or the equivalent of $14.4 million (£11.5 million).

US bank Jefferies issued a target price of 350p following last month’s annual results, with RBC Capital at 400p after pointing to Hunting’s solid balance sheet, attractive growth profile and a target for $100 million (£79.5 million) of energy transition revenues.

The broker added: “Despite current weaknesses in US gas prices, we believe this concern is more than offset by the growth in subsea demand and improving utilisation across the business year-on-year.”

Generating healthy returns

Rupert Soames has marked his appointment to the Smith & Nephew (LSE:SN.) board by spending £117,000 on shares in the medical devices business.

The purchase took place on the same day that shareholders of the FTSE 100 company approved his election as a director with 99.92% of AGM votes in favour.

The ex-Serco boss is in line to become the company’s next chair, succeeding Roberto Quarta who is stepping down in September after nine years at the helm.

The investment by Soames was made at 1,294p, the highest level for shares in a year after the company’s AGM trading statement revealed better-than-expected first quarter revenues of $1.36 billion (£1.1 billion).

The shares closed the week at 1,314.5p, representing a rise of 17% in April as investors warm to the turnaround strategy launched last summer by chief executive Deepak Nath.

His plan to make Smith & Nephew a “consistently higher growth company” is still in the transformation phase, with a focus on orthopaedics after the recent performance of the knee and hip implant division was held back by poor operational systems.

The trading update revealed underlying revenues growth for the division of 3.9%, compared with 10% in sports medicine and 7.9% in advanced wound management.

Liberum said the results were a “clear step in the right direction”, beating expectations and demonstrating that orthopaedic supply issues are at least partially resolved.

The broker, which lifted its price target from 1,410p to 1,476p, added: “One quarter does not a year make but, while we leave our (earnings) forecasts largely unchanged, forecast risk is clearly reducing.

“We continue to value Smith & Nephew at a 15% discount to its peers, driving a higher price target of 1,476p suggesting that the recovery story has more to run.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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