In keeping with a profitable long-term investment strategy, I often turn to FTSE 250 energy stocks.
Several energy and oilfield service mid-caps offer potential stock valuation gains along with dividend income.
But one that really captures my attention is Hunting (LSE: HTG).
The company is loosely placed in an energy mid-cap grouping, given its huge operational footprint of servicing the sector. But Hunting is neither a producer like Harbour Energy nor a contractor like Petrofac, even if it may offer engineering products to both.
In fact, a bottom-up analysis of its business plans and product suite points to a customer outreach well beyond energy industries. This bodes well for Hunting’s long-term future, and may mean there is significant growth potential from its current share price.
From the ocean bed to infinity and beyond!
For starters, the company’s three “core” business product segments — resource well construction, completion and intervention, and its Titan products suite — have plenty of established customers worldwide.
Its decades-old Oil Country Tubular Goods (OCTG) business — casing, tubing, piping and pipelines used for hydrocarbon extraction — is currently in a cyclical upswing, amid relatively higher energy prices. Company estimates point to a year-end 2023 EBITDA of $99.5m, rising to $130.6m in 2024 and $163m in 2025.
But it’s Hunting’s “medium-term growth strategy to 2030” – predicated on maintaining its “robust non-oil and gas revenue” supported by “strong energy market” takings (of the sort seen in 2023) – that makes things really interesting for me.
Its precision engineering product suite now stretches from subsea to space. That sees Hunting partner with Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin to manufacture components for their rockets just as comfortably as it does with oil and gas companies for their drilling operations.
At its recent capital markets day in September, Hunting’s order book and tender pipeline stood at $500m and $1bn respectively. That’s a strong backdrop for the business and a glimpse of future revenues.
Steady stewardship matters
Hunting also benefits from an astute, pragmatic and hands-on CEO in Jim Johnson. In my various conversations with Johnson over the years, I have always found him enthusiastically outlining pathways for future-proofing the company he joined 35 years ago, ultimately rising to the CEO’s office in 2017.
That strategic long-term thinking is making Hunting’s products as mission critical for rockets as they are for rigs! Johnson’s steady pair of hands are also overseeing an “inexorable direction of travel” to revenue accretive emerging markets. Recent moves include expansion in the Middle East and a joint venture in India.
With Hunting literally going places, for me this dividend stock appears undervalued by around 40%. That’s based on valuing the company at £660m ($815m) or five times its projected 2025 EBITDA, versus its current market capitalisation of £480m.
Caveats do apply. An oil price slump below $70 per barrel could serve as a near-term drag. The current high interest rate climate and inflationary pressures will likely limit the potential for medium-term share price gains beyond 450p. Income seekers may not be satisfied with Hunting’s 3% dividend yield.
But overall, I see more pros than cons, and a company with a diverse product portfolio gearing up for an exciting future. Therefore, I am inclined to buy more of its shares.
