- Order books have soared in the past year
- Hunting share price gains show investor eagerness
The swings and roundabouts of the oil and gas world continue with Middle Eastern spending more than balancing out weaker US demand for new equipment and services. UK investors could miss out on some of the proceeds, however, with Wood Group (WG.) back in takeover talks and Petrofac (PFC) desperately seeking a bailout from lenders. However, Hunting (HTG) is flying the flag, announcing two massive orders from Kuwait Oil Company (KOC) in the past month.
One analyst said this year had proved a turning point for the highly cyclical industry. “We continue to see a multi-year recovery in oil service margins, largely driven by increasing capacity utilisation,” said Alex Brooks at Canaccord Genuity last month. The top producer in the region, Saudi Arabia, may be cutting oil development spending, but is shifting cash into gas. Smaller producers such as Kuwait are also following this strategy.
Hunting’s share price was already on the march before the Kuwait deals, but it turned a year-to-date improvement in the share price from a quarter to over 40 per cent. On a 12-month basis, the share price has doubled.
The combined order total of $231mn (£182mn) will contribute to KOC increasing oil production as well as “further developing natural gas output”, Hunting said. KOC now accounts for almost a third of its total order book, with the lion’s share of the sales to come in 2025. The company has also made sure the order has a "minimal working capital impact", Brooks added, limiting the risk of scaling too quickly to meet the orders of one client.
This is not America
The sector’s major players have noted a shift in spending. “This cycle continues to be defined by broad growth across the international basins, and nowhere is this more evident than in the Middle East and global offshore markets,” said Olivier Le Peuch, chief executive of SLB (US:SLB), formerly known as Schlumberger. “In the Middle East, countries are investing to increase both oil and gas supplies through the end of the decade.”
For SLB, this boom is enough to balance out lower spending in the US even in its well construction business. Hunting is still highly exposed to the US onshore sector, despite the shift elsewhere.
Berenberg analyst Richard Dawson said expectations had dropped for a quick return to growth in that sector. “We still believe that the US market can recover, but the timing of this is now less certain and could be pushed into 2025,” he said.
Halliburton (US:HAL) has seen a less dramatic increase in Middle East and North Africa sales so far this year, with a 6 per cent climb in sales for that division. Chief executive Jeff Miller also pointed to 2025 for a gas-driven recovery in his home market for equipment sales.
“The fleet for the [onshore oil and gas] market is shrinking to meet the demand that's there today and that happens every day,” he said. “Equipment is not being built… it will [become] an incredibly tight market.
“I'm actually quite excited and confident about what gas means to the North America market,” Miller added.
Halliburton gets almost half of its sales from the US and a quarter from the Middle East, while SLB has a larger Middle East business.
Broader exposure
Back in the UK, Wood has a broader range of work than Hunting or Petrofac, and is also moving away from massive lump-sum projects. But even in this transition period, the order book was 9 per cent higher than a year ago at the end of March, at $6.2bn.
A recovery is expected in the second half for project orders as well, the company said. Chief executive Ken Gilmartin said last month there was “really strong growth” in offshore consulting work and “decent growth” in offshore projects.
The focus for management right now is talks with competitor Sidara over a potential 230p-a-share buyout of the company. Shareholders pushed for a more collegial approach and the board said last week it would consider a firm offer at 230p.
The other UK-listed major player in this space is Petrofac. Even while trying to rescue the company from collapse in recent weeks, management has still talked up its record order book. Petrofac’s chief financial officer Afonso Reis e Sousa said the increase in order backlog for 2023 was the “strongest in five years”, having grown to $8.1bn.
The company is likely to hand ownership over to lenders if it is to survive, and even that route away from bankruptcy is difficult. Bondholders can launch enforcement action on 14 June as Petrofac has not paid the coupon on a 2026 bond in months.
Trading in the company’s shares restarted last week, and there is some optimism in the market – the shares were frozen at 10.5p in late April and hit 20p this week. The price remains volatile with low volumes, however, while its bonds are trading at just 25 cents on the dollar. The price of the 2026 bonds has halved in the past two months.
The company’s order book was boosted in the second half of 2023 by a $1.3bn deal with ADNOC in the UAE and two offshore North Sea wind projects worth a combined $2.5bn. The flow of new deals has stopped since the strategic review was announced in December, given the company cannot provide the performance guarantees that protect clients from company collapse midway through a project. Petrofac remains a significant player in the North Sea and in the Middle East, albeit one likely to be in the hands of debtors very soon.
