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Edited Transcript of HTG.L earnings conference call or presentation 25-Aug-22 8:30am GMT

Half Year 2022 Hunting PLC Earnings Presentation London Aug 26, 2022 (Thomson StreetEvents) -- Edited Transcript of Hunting PLC earnings conference call or presentation Thursday, August 25, 2022 at 8:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Arthur James Johnson Hunting PLC - CEO & Director * Bruce Ferguson Hunting PLC - Group Finance Director & Director ================================================================================ Conference Call Participants ================================================================================ * Erwan Kerouredan RBC Capital Markets, Research Division - Assistant VP and Analyst * James Thompson JPMorgan Chase & Co, Research Division - Analyst * Thomas Andrew Rands Investec Bank plc, Research Division - Industrials Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [1] -------------------------------------------------------------------------------- Well, good morning, everybody. Glad to be back here in London. I want to thank Buchanan's for putting this all together for us today. It's nice to see things returning again back to normal with COVID fading away and all this and that. One of the things I want to do just a short story before we get started here today. I had the privilege a few weeks ago to visit our team in Singapore and our team in Batam Island in Indonesia. And while I was there as well as getting an update and a briefing on the business and meeting the team and looking at succession planning and all those type of things, I had the fortune to go to Batam and be involved in the celebration that marked 10 years without an accident at that facility. And I bring that up ahead of this presentation, just to remind people that we -- our organization is a very fine-tuned machine. We take a lot of effort in making sure we do things right. The team in Batam to go 10 years is an outstanding accomplishment, and it plays well and talks a lot about the people of our organization. So today, we're very optimistic. We're delivering what I think are some very good results, and more importantly, some very good comments about our outlook going forward. And none of that would be possible without the team that I'm fortunate to work with every day. So with that, I'm going to go on and talk -- start our presentation. We start first on the macro side of the business. And I think the issue right now that continues to play in my mind is how in the last couple months, at least since post-Ukrainian invasion by the Russians, things like our energy security and energy use in general, the fact that we've taken all of that for granted for so long is really coming back to haunt us and as far as the developing people and the developing economies go. We have underinvested in the business, we've had bad government policies, we've had all these things come together to make what could potentially be a big train rec here in the future. And all of the fundamentals that we are seeing in front of us are showing that the world is still going to need a lot of hydrocarbons going forward. Comfort matters. People want their standard of living to be enhanced, not decreased. They want affordability in their energy. And long and short of it, is you're going to have to put holes in the ground and complete wells and go explore and drill. And so we are sitting right now in the early stages of a strong recovery that we feel will go many, many -- last for many, many years. And we feel we have the right products, the right mix, the changes that we've made to refine the business are paying off. And so I'm standing here in front of you today, extremely bullish about our outlook going forward and thankful for the improvements that we've made to date. On the highlights slide, Slide #2, the financial performance continues to improve. Literally, every segment of our business has shown improvement year-over-year on the half year results. Our sales order book is now over $400 million. And being as many years as I've been with the organization, I don't remember it ever being at those levels before. So a lot of increased activity, increased [holding] activity. We are dealing with inflationary issues, but I think we're dealing with them well. We continue to manage through those. And hopefully, as I mentioned earlier, we want to contribute to the inflation in the industry as well in our pricing, but we need to see an improvement in pricing. As people get busier, there becomes less pressure on pricing from a discounting point of view. So we're seeing, again, typical supply and demand. demand is picking up, supply is limited. There's not a big rush to expand capacity in any segment of our industry. And so I think you're going to continue to see pricing move north as this recovery goes on. One of the things that I wanted to highlight, we do have the new asset-based lending facility in place, the $150 million. Chris Berris, Bruce Ferguson did a great job on getting that put together and the rest of the team enhances our liquidity. We did it at the right time. That with the cash we presently have on our balance sheet is leaving us sitting in a pretty good position. And with that, I'm going to turn it over to Bruce. -------------------------------------------------------------------------------- Bruce Ferguson, Hunting PLC - Group Finance Director & Director [2] -------------------------------------------------------------------------------- Thanks, Jim. The first slide we have there is the adjusted group income statement. And this really reflects the improving sentiment that Jim has been talking about. If you look at our revenue figures there for the first half '22, we've seen a 38% increase from H1 '21 and again, showing the increased activity coming through the numbers. The gross profits were 75.8 for H1 '22 against the 44.1 in the first half '21, and that's a 23% gross margin. So we're starting to see the improvement in sales prices. We're seeing the improvement in the utilization figures, more than offsetting the inflation costs. That all comes together for an EBITDA of $20.6 million against a loss of $3.6 million back in H1 '21. We've got a small loss of the share of associates rival in Cumberland 1.3 to give us a loss before tax of 0.5. We do have a tax charge on our U.K. Canada businesses. So that will give us a loss after tax of 3.7 for the period, which is much smaller than the 27.2 that we saw H1 '21. On the next slide, we have a deeper dive into our EBITDA, tracking how EBITDA has performed since H1 2020, which is effectively pre-COVID. Then we see H2 '20 and H1 '21, which was the COVID years. And then we see that recovery coming through for H2 2021 for 6.7% with the 20.6% that we're reporting today. So our EBITDA margins are improving. They're up to 6%. And we do see that improvement continuing over the second half of the year and getting back to where we were pre-COVID levels. In terms of our segments, we have a further analysis of our segment results. All product lines have shown improvement, which is good to see. We see our Titan business to firstly come back, sitting at $127 million revenue, which is 42% higher than we saw in H1 '21, and that drove an operating profit of 4.3, which is really driving the return to profitability of the 1.7. So good sales in U.S. onshore for Titan, but also good sales internationally into likes of China, Canada and also South America. In North America, again, we saw improvement. We're up at 42% improvement from H1 '21 to '22. We got the operating profit back to breakeven from a $10.4 million loss, and that's been driven by some good improvements in either such as U.S. manufacturing, which saw a 60% increase in revenues and also in areas like U.S. connection as well. EMEA, we saw an increase in revenues, and that's despite some significant restructuring we've done last year. And we're seeing the reduction in that operating loss from 6.6 down to 2.2. Good growth in areas such as well intervention and well testing. Well testing sales are up 100% from the same period last year. Asia Pac suffered a little bit in quarter 1 through the remnants of COVID and also some logistic challenges with the closure of Shanghai and other ports, which did constrain the H1 numbers. Again, we're seeing much stronger results coming through H2 and report as a large order that's going to be delivered into next year as well. On our next slide, we're looking at bar charts of all our revenue by products, and they're all showing improvements from over the last 2 periods. Our Perforating Systems has come back, 42% improvement H1 '22 over H1 '21. We've got OCG up 43%. And again, that shows good recovery, again, despite having Canada restructure and also North Sea as well. We see an increase in advanced manufacturing. It's not quite as high as what we've seen in both OCG and Perforating Systems, and that's due to some supply constraints, the likes of chips for electronics. And then we see continued improvement in Subsea and Intervention Tools as well. We always keep a focus on our oil and gas and oil and gas business. We've seen that perk up from 17.5% this time last year up to 24.1%, around about 7% of our business. But the order book going forward is much stronger on the non-oil and gas business, so we see that percentage picking up going forward. On to the balance sheet. Our balance sheet remains strong. We see our property reduced slightly, and that reflects the small amount of CapEx we've put in place over the last period, which is lower than our depreciation. Goodwill, 196 primarily in the Titan and Enpro business, reflect associate and joint ventures for Jindal, Cumberland and Rival. Working capital has increased by $21 million, and that's due to -- it reflects the up cycle as we're adding to inventory and trade receivables. And we'll do a little bit more detail on the next slide as well. But that still leaves us with cash of $85.6 million, so good performance there. We take into account our $150 million facility, ABL facility, that gives us good liquidity and a platform going forward. Our inventory days continue to go the right way. We're down 143 days to 163, our receivables from 87 down to 80. So good efficiency in terms of our working capital there. And on a working capital, we've got analysis for $299 million that were reflected on the balance sheet, showing an inventory position going from $204 million up to $220 million, again, just reflecting the up cycle. And then we see more invoices being booked on the receivables with some more payables offsetting that coming through as well. On the last slide, we have cash flow. We're showing EBITDA plus a noncash awards -- share awards of 4.8 to give us 25.2. We do see the cash outflows that we're talking about in working capital there at 22.1 We have got some net tax paid as well. All that works through to free cash flow of negative 3.2, a relatively small historically a matter of CapEx at 8.9, dividends of 6.4 and with the exchange, that gets us back to 28.8 reduction in our cash just another half year. And with that, I'll hand back to Jim. -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [3] -------------------------------------------------------------------------------- Okay. Thanks, Bruce. Talking about -- following up on the fundamentals for the business right now, I think the key points today are in the first upper left box. We talk about the E&P clients out there right now. Capital discipline is still raining in the business. I think that there's no doubt the reward profile for E&P companies has changed dramatically in the last 6 or 7 years. Back in those days, before the great -- I call it the great bankruptcy rush to happen. Production, production, production is all that matter. Drilling was going regardless of some of the economics. Today, we just do have a much more disciplined client base. And so that, along with ESG pressures from the investment community, you all see it they're focused on returning cash back to shareholders and being disciplined for the long term. On the demand side, we're still at 100 million barrels a day, plus or minus. We don't see any recessionary fears driving a big downturn in global demand. If anything, we think it's going to increase because of the lockdown situations we've had at COVID. You still don't have air travel back to where it was. We still have had China under lockdowns off and on. And we just think that that's going to be still a bullish number going forward and don't see any big changes going away. The other key with that whole demand and supply issue is, I think, people keep forgetting, again, part of the security issue. In the U.S., we've been pumping out 1 million barrels a day out of our strategic petroleum reserve. That's going to end soon. I think it ends in October. Other Western countries did the same thing. And I -- we personally believe the demand-supply imbalance or balance is a lot tighter than what people are talking about. The industry upcycle, for me, the exciting thing about that is seeing offshore come back to life. Titan has done great as Bruce and I talked about the first business to go down, first one to recover based on strong fundamentals in North America. And again, when you look at those barrels that are being drilled there, those are the most ESG-friendly barrels in the world outside of probably the North Sea. So good business there. But what we really need for the service industry is a strong recovery in the offshore market. And while rig counts in places like the Gulf of Mexico aren't setting the world on fire or the North Sea, you are seeing tremendous upside and tick up in activity in places like Brazil, Suriname, Guyana, some Africa work on the West Coast of Africa, all of which we're benefiting from. And that even ties in today with the announcement we made about our offshore business in China. So we're bullish on the outlook for that because I'll go back to a presentation I made a couple of years ago where Hess made a comment that -- and I might be off by a number or 2, but it was something the equivalent of 7 wells in Guyana equaled 1,400 wells in the Bakken as far as production goes. And when you look at the long life of those offshore assets, it's an investment decision that I think is going to be becoming more pronounced going forward, and those are bright signals for us as a company. Again, other graph, E&P CapEx, we're still significantly down. Part of the energy security issues I talked about earlier, we've really been in a state of extreme under investment since 2015. And when you look at those numbers, which are not adjusted for inflation, it really makes it even worse. And so again, early stages of an up cycle, I'm feeling good about where we're at right now. Market overview. You guys are all up on this. Again, the spears results are there. Same thing that I like to see lower left, upper right, all going in the right direction. DUC count in the U.S. is declining because they have drilled -- they have taken advantage of those DUCs door in the downturn when they didn't want to spend money on extra holes in the ground. But that's becoming to me more of a irrelevant number because the rig efficiency itself. And if you listen to what Patterson's saying or the people at neighbors, I mean they're just drilling these wells a lot faster though too. So you got better efficiencies in drilling. The DUC numbers are, again, they've declined, but that was more of a CapEx decision on what the operator was going to do. One of the things that is not talked about enough, I think, from a service point of view is our outlook on natural gas. When I look at whether it's our Titan business, our premium connection business, some of our OCTG business that's going into the Middle East, a lot of it is natural gas focused. I get questions from some of our investors, what about oil, what about natural gas? For us, we don't care. It's the same operations, same procedure, same equipment. So we're totally agnostic whether it's oil or natural gas. And you can even probably throw in geothermal and some other things like that as well that we still can supply kit to. But you all know what the prices are. I read -- read EFT every day that I'm here. Natural gas prices are going crazy. The U.S. price is about $9 at Mcf, hugely profitable number. And keep in mind, that $9 figure, when I look at the hedging situations in place by our customers in North America, most of them are still not getting that price. So they've hedged at 3, hedged at 2, some of them with a 2. So the cash flow from these E&P operators with natural gas exposure should only accelerate more dramatically as this year goes on and into next year. Which, again, they've got to replace it, you got to drill more wells. Demand is there for North American natural gas. So I'm very bullish on that segment of our business. I talked briefly earlier about the offshore activity. That talks about the FIDs going on, the development work going on, forecast awards going through. I watch closely the commentary from FMC, and of course, the Transocean's and the Valarisis of the world. Day rates are picking up. Utilization rates are now over 80% for a lot of the fifth-generation deepwater rigs out there. FMC is talking about tree rewards, continuing to expand all drivers that drive some of our business. And so the numbers are there. I'm very optimistic about our rebirth in the offshore business. Our performance and key performance themes, Hunting Titan has done -- the group there has done a great job through this -- through the downturn, managing the downturn and in the recovery. Our revenue was up mid-40s percent year-over-year, nice increase in international orders, even though it's a smaller part of what we do. Canada was very strong. From a business perspective, 25% roughly of our business in Hunting Titan is West Texas Permian. The good news is the other 75% is very well spread across all the other basins throughout the country. So good job there, good technology development, good control on cost and managing the inflationary issues through the cycle. Our North American businesses, one of them that has done a great recovery and has impacted the positive results of our OCTG has been our U.S. manufacturing operation. Big turnaround there, driven by improved outlook for well intervention equipment and completion work in the Gulf of Mexico for deepwater as well as export for some subsea equipment and for places like Guyana and Suriname. So good results there. Premium Connection business doing extremely well. And the rest of the Subsea, the other segments in there, every business unit that we have and every product line is showing positive momentum. So there's none that I have anything negative to say about. Europe, Middle East, Africa, big swing in improvement in results year-over-year. One of the things I'd like to highlight is the increase we had in our revenue year-over-year, the 38% that Bruce talked about. Keep in mind, that's with us being basically out of the pipe business for 6 months in the North Sea. So that gain to me, when you factor that in, that shows even more about how well that we've done as a group. Stuart and the team in Aberdeen have done a very good job of refocusing that business. Things like the organic oil recovery are starting to gain a lot more traction now with purchase orders coming in, well intervention businesses improved. Our Holland facility, which we talked about, booked well into next year for export business out of Europe. So we've got some exciting things there. Asia Pac. Last one to decline, last one to come out of the downturn. I talked to you about the safety record and the people, but the performance there is improving dramatically with orders in Kuwait, some other Middle East destinations. We're benefiting already from business in India with the working with the Jindal people. And as today, we announced a big order in China, and we just think that whole offshore region is going to benefit more for us. One of the upsides that we can't quantify today, but we're seeing an increase in activity on is the opportunities for geothermal in places like Indonesia and the Philippines. So with local content issues that you have to be in Indonesia, it's one of those things that it could be a much, much brighter picture even on the geothermal side for our company in those markets going forward. Bruce has already talked about inventory and working capital and issues like that. Again, getting back to Titan, I've pretty much talked about it. You all know what the frac spread count has. We're at a point right now where kind of with the rig count in the U.S. as well as the frac spread count, not a lot of growth happening. A lot of that's being held back because of labor issues. I mean the people issues throughout our industry or like every other industry, really, it's difficult people-wise. And so those 289 crews are much more efficient today than what they were a year ago. So they are doing more frac stages quicker. Again, I'll keep the dollars flowing into people like ourselves. But I don't know how much higher than 289, we're going to see that count go this year. I talked about the DUC count already and the constraints on the operation. But there's just a few other graphs there to talk about well completions and what's going on, on the Titan side. And I want to say also natural gas, I think, has a lot of upside to add to this going forward. The international business, we talked about briefly. Argentina has actually been a very good market for us. So the team in Houston has done a very good job of growing the Latin American business. We see that as being an increasing place of opportunity for us forward based on what's happening with the policies in Argentina. But it's a slow and steady move forward. Again, I'll remind everybody on the international front, a lot of that, Titan type of kit is handled by the majors, the Halliburtons and the themselves. So that's really who you're competing with. You're competing with license issues that sometimes are controlled by militaries in all these countries. So it's a different world, but it's one that we are seeing growth in and hope to continue to see growth next year. I talk about movement to the H3 perforating gun system. It's a -- performance-wise, it's not -- it performs as well or better than H1. The real thing is, once you start developing a product line, you look at how the lean, get in with lean operations, make it more efficient. And that's really what H3 evolved into. Debt core operation has been a home run for us. We made that investment. We're looking at expanding that debt core capacity in 2023. It's not a huge investment. Perforating Systems, Pampa has been -- is busy. We've put some more automation in there. During the bottom of the downturn. And I'll just remind everybody, 1 month, we went down to like $6.7 million in revenue. So it was a massive collapse that we saw in that business. But we had shut down an idled Oklahoma City. We also closed Canada where we manufactured perforating guns as well. So now with the rebound in activity, we've reactivated Oklahoma City, people up there are making guns for us now, and we're doing an expansion in our facility in Monterrey, Mexico to help the Latin American market and also in areas such as South Texas. New product development, ControlFire, I'll probably have more to say about next year, but it's really an efficiency gain for the operators as they're controlling the perforation operations downhole. Knockout 360 is basically a refined charge system for plug and abandonment. It's primarily -- not primarily, it's always an offshore opportunity. But with offshore coming back with liability these people have, now that they'll have cash flow to start doing more P&A, there should be upside with that. Debt core, I've talked about. And then the bottom right where the [Red Sea] adapter is really a way to use 2 of our tools for casing wear. And I forget the other one now. But anyhow, it utilizes 2 tools, reduces time over the hole and allows for a more efficient operation. North American overview, I talked a lot about that before. It's all written up there. Strong demand coming into all of our businesses. USM has been a real bright spot. Our U.S. manufacturing for that turn that we've seen there. We'll talk a little bit more about Connections and Subsea. The big deal with Subsea to us has been the turnaround in business from RTI, the RTI acquisition. It's been a home run for us. We continue to work with our partners at Well Data Labs and work with our investment in Cumberland. They're moving ahead -- moving forward at a good rate. Cumberland right now has had delays in the facility in Pittsburgh because of supply chain issues. Apparently, there's a huge delay in getting transformers and equipment like that. But that facility in Pittsburgh, which will be their second one with -- the one in Austin, will be fired up in October. A slide on the connection technology shows you the number, joins threaded. The TEC-LOCK product line continues to do really well, pretty evenly balanced with oil and -- well, it's more oil, but a lot of natural gas exposure with that product line, done well. Great job by the team that Mike Mock leads in Houston with that. Nice to see the growth. And also the Canadian operation has done really, really well. So we changed that business model again, got out of the pipe business, let somebody else handle that, focus on the technology, the results have been incredibly better in the time period. Advanced manufacturing, we're seeing a big part of our backlog has been in advanced manufacturing. It's also one of these areas that does have some supply chain issues that are -- that is getting better. But when we talk about diversification, the Dearborn backlog right now is about 80 and it starts with an 8, depending on what day of the weakness. So you're an $80 million, $82 million and 60% of -- I'm sorry, 80% of that 80 is non-oil and gas. So big exposure to the aerospace business. People like SpaceX, Pratt & Whitney, Sikorsky Helicopter, a lot of other people in that area, we love that business. Though there's a big lag time on procuring and getting delivery on what I'll call the super alloy materials in that, that those products use. So if you follow, whether it's an Alcoa, our Carpenter Technologies, they've all had labor issues. They've all had supply chain issues. That has filtered down not really in a negative way, but it has extended the time of delivery for some of these exotic parts. And so we're expecting a much more improved performance out of the Dearborn and the electronics business going into 2023. On the electronics business, again, it's chips. So whether you're making in The States, if you're making a 4 F-150s or refrigerators or perforating guns or MWD equipment, you got a chip issue. And we have done some -- taken some measures to look at diversifying our suppliers, but it's just been a very, very difficult environment on the chip side. Those issues are going away. We're expecting a really strong fourth quarter. Backlog in that business continues to accelerate. Our backlog with Schlumberger has never been bigger at our electronics business as a sign of what's going on out there. So I'm excited about more of the '23 story for those businesses than what we're at today, but again, all going in the right direction. Stafford, I talked about a little bit before on the Subsea side. This business is joined at the hip with whatever happens in the subsea tree business. So again, as I mentioned, follow what FMC is stating. We have the largest market share in these products, in the industry, great products, great technology, high-quality levels. Outlook should continue to expand and get better going forward. Subsea Spring, a big deal for us. I think the key number is that $85.5 million worth of business booked in 2 years from a product line that was basically in hibernation. We have some very prestigious awards that we've received in Guyana, in Brazil, in the Gulf of Mexico. We think that, that's going to continue to be a big growth area for us. We're just seeing a change in mentality on this product line. And now that you have people actually doing the technical work from our side with the clients like an Exxon, I just think there's a big upside for this business going forward. The FPSO market is really what it's focused on. One of the advantages of using the titanium is the ability to get oil to market quicker, believe it or not, with that product versus others that are used as well as some safety issues, hurricane prevention issues as far as on and off location goes. But the FPSO market, it should continue to grow because they're getting further and further away from shore. They're getting to areas that they don't have the brownfield sites to tie back into. So we're optimistic about that. Enpro, one of those businesses that we actually bought it -- I made the story I felt like the guy on the helicopter leaving Saigon in '73 or whatever. I literally bought that when COVID hit, and you couldn't travel or do anything anymore. The team there has great technology. Backlog is improving, opportunities are improving. But again, it's more at the back end of the subsea work. So we need to get the rigs working, get the holes in the ground, the development going, that's where Enpro will fit in, in those development projects following the trends of the FMCs. Some of our other businesses, I touched earlier about our OCTG business in Canada. Great results over there, continues to improve. Technology speaks for itself, low-capital focused business. Trenchless, one of our non-oil and gas businesses, seeing a marked improvement in opportunities in business there as utility and infrastructure spend becomes more important. And I think that will be more growth into '23. Our USM business, I talked about specialty, which supplies kit to MWD to -- actually to directional drillers to repair and service MWD kit. It's part of the CapEx cycle. It's been slow to recover, but it is recovering at a steady pace. And as these operators work these rigs hard, work this equipment hard, the demand is going to be there for more of that equipment, and we'll benefit from that. EMEA, we talked about already. Restructuring's done, organic oil recovery. Bruce is -- I was actually the expert on that, but we're getting firm purchase orders for people like CNOOC in the North Sea. People like MOL in Hungary, some other places in the Middle East, Petrogas in Qatar, some others. So it's finally starting. It's gone from the development and testing now into actual commercialization where there'll be more dollars coming into the company. Well testing has been a strong area for us. A lot of that is -- there's some offshore focus with that. U.K., Netherlands, I wanted to talk about, we did the restructuring. Our Dutch facility right now is very busy. We've been hiring people. I believe we're going to go to a 24-hour a day schedule here within the next month or 2. A lot of that based on the work with Tubacex for Petrobras in Brazil, where we're doing a lot of OCTG threading and accessory manufacturing. It's all on some high alloy materials going to the Brazilian market. So Holland has always been very strategic from a European mill supply point of view of working to export. And that's a case that this business takes us well into 2023. Asia Pac, we've talked a little bit about, very optimistic about '23. One of the reasons why we put that release out today is super effort from the team in China and Singapore and putting together the order for CNOOC. I'm just very optimistic that we're in early stages there. We are seeing more work in the Middle East, more operations happening there. We are seeing a pickup in completion activity in the Asia Pac region with people like Halliburton and Schlumberger and Baker who we are a supplier to, and we're working with. So it will be better results when I talk to you the next time on that as well. So in summary, I think we are in early stages of a long-term recovery. I'm pleased on what we've performed at in the last 6 months, but we're not content. And so we're going to continue to work hard to fine-tune our efficiencies. We've never backed away from our lean initiatives within the organization. But the fortunate thing is we have the people and the talent and the product lines to really capitalize on what I think is a long-term recovery in the industry. And with that, I think I've talked enough. And question time. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Erwan Kerouredan, RBC Capital Markets, Research Division - Assistant VP and Analyst [1] -------------------------------------------------------------------------------- Erwan from RBC. Congratulations first on a very constructive set of results. -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [2] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Erwan Kerouredan, RBC Capital Markets, Research Division - Assistant VP and Analyst [3] -------------------------------------------------------------------------------- Two questions. First, on frac crews, U.S. and frac crews. And the second one on the offshore outlook. So on the frac crew situation in the U.S., very near term. So on one hand, like there's reasons to still remain a little bit cautious and very near term. But on the other hand, you're quite excited about the nat gas prospect. Can you just clarify the overarching picture for the people situation in U.S. onshore? -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [4] -------------------------------------------------------------------------------- It's not only the people situation. If you listen to what Nexteer has said or Liberty has said or (inaudible) they're not rushing out to reactivate frac spreads right now. They -- the suppliers need -- like everybody else, we need to get pricing back to everything back to a more healthier level. And I believe some of these frac spreads, I mean they need $15 million, $20 million to reactivate one of these units. There's a big push, obviously, to go to natural gas fired and getting rid of diesel. So the more efficient ones out there, but the new replacements of those are costly. But I think right now, what you're seeing from the main frac companies is we're just going to hold a limit. And so it's not just people. It's the lack of we're not going to invest a bunch of money and go crazy building out capacity. -------------------------------------------------------------------------------- Erwan Kerouredan, RBC Capital Markets, Research Division - Assistant VP and Analyst [5] -------------------------------------------------------------------------------- And you don't see any major difference across like private and public -- large public companies that could be potentially meaningful for Hunting and... -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [6] -------------------------------------------------------------------------------- Well, we're doing business with a lot of private companies. And I'm fortunate when we do our -- we have our weekly meetings. But I see every week, for example, on our Premium Connection business. And literally, there's companies we're doing business with that, I didn't -- never heard of 2 years ago. Same with some operators on the Titan side. So there is a private group out there, and they are very busy and very active. But most of them are owned by private equity guys sitting in New York or Boston and places like that, and they're not crazy about spending going out of control. So I think even those operators' capital discipline is better than what it was in the past where management is being rewarded on profitability, not on production. -------------------------------------------------------------------------------- Erwan Kerouredan, RBC Capital Markets, Research Division - Assistant VP and Analyst [7] -------------------------------------------------------------------------------- Understood. And then the second question is on offshore. So there's a lot seems to be a lot to be excited about on the offshore outlook. Besides South America and Guyana, particularly, where are you most bullish for like, say, the next like 9 to 12 months? -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [8] -------------------------------------------------------------------------------- I think you're going to see a rebound in the Gulf of Mexico. Shell has announced they're doing like 25 wells or they want to do 25 exploration wells over the next 2 years. There's a lot of life left in the Gulf of Mexico. Part of the problem in the Gulf of Mexico, I think, has been political uncertainty. But you've got these changes now with the new Inflation Creation Act or whatever we're calling it now, but where they're looking at opening up more of the offshore licensing. So getting clarity on that outlook, I think, is important. But I'm still bullish on the Gulf of Mexico. South America, obviously, Brazil [soaring]. Apache just had a nice -- announced a fine on Block 53. I think it is in. So there's a lot of positive things going on there. We're seeing some positive things on the Northern West Coast of Africa that are exciting for us with some clients there. That's primarily rolled into the Enpro business. And then I think all of Southeast Asia, the offshore market is going to be strong. And I'll also mention, even in places like Kuwait who everybody thinks that's onshore, I mean, they just signed a deal with Halliburton, and they're going to actually drill a deepwater well in -- of Kuwait and do some also some jackup work. So again, the reserves are there, the potential is there. I just -- there's a number of places where it's going to be positive. -------------------------------------------------------------------------------- James Thompson, JPMorgan Chase & Co, Research Division - Analyst [9] -------------------------------------------------------------------------------- James Thompson from JPMorgan. A couple of questions, if I may. First of all, in terms of U.S. onshore, you kind of laid out a picture of frac spreads not necessarily growing that much anymore. The rig counts kind of flattening off at this point in time and the DUC drawdown has been pretty significant. So in terms of kind of growth in that business, are you kind of giving us a picture of a little bit of a slowdown in growth kind of 2H into the first half of next year? And where is maybe the growth opportunity within that question, maybe you could talk a little bit about recompletions, we've sort of heard about refrac and whether there's a big revenue opportunity in actually re-completing our wells in the U.S. -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [10] -------------------------------------------------------------------------------- I actually did want to bring that up. So on the growth area, I mean, I'm not saying anything that isn't already public, right? So I'm going by what I'm hearing from our clients like at Liberty and Nexteer as far as availability of frac crews and the fact that they're not rushing out to put a bunch of them to work, today. I follow what Halliburton says with their deal that, again, they're not going crazy adding to capacity because we need to get pricing up. I think pricing will get up, like we're seeing in our businesses. And once you reach that pricing point, then everybody does have to look at growth. And I really believe one of the strong drivers going into '23 is going to be natural gas. I think when you look at the rig count in natural gas, it's pitiful compared to what it was 4 or 5 years ago. Part of that is they're a lot more efficient today. But the draw on LNG out of the states, not to mention the fact that even our U.S. numbers were well below the 5-year average in storage. People are going to get -- I think they're going to get very, very eager to pick up the natural gas side of the business, which, again, for us, oil and gas, we don't care. So that's a good story for us. What was your other part? -------------------------------------------------------------------------------- James Thompson, JPMorgan Chase & Co, Research Division - Analyst [11] -------------------------------------------------------------------------------- On the refrac side. -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [12] -------------------------------------------------------------------------------- On the refrac side, so we actually discussed this amongst ourselves. We are seeing a pickup in refrac activity, primarily in Texas and Oklahoma. I would say today, the number that we came up with for the Titan business in general was just a couple of million dollars for the first half of the year. But we are hearing more conversation about that where operators can go spend $75,000, go into an old Barnett Shale well, do a refrac job, run some more guns in there on places that they missed or didn't know about and get a really, really quick return. So I think that's going to be a growing part of the business over the years. Is it a $5 million year opportunity or a $25 million? I don't know yet, but it is being talked about more. -------------------------------------------------------------------------------- James Thompson, JPMorgan Chase & Co, Research Division - Analyst [13] -------------------------------------------------------------------------------- Second question, on the competitive side of things, how are you feeling in terms of some of the competitive dynamics now? Obviously, business is improving, you're talking about pricing discipline. Some of your customers continue to be obviously very disciplined about their capital plans. Maybe give us a little bit more dynamic about the competitive environment as you see it today? -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [14] -------------------------------------------------------------------------------- Yes. I think the competitive environment is more disciplined going forward today because people aren't as desperate. So there's always that balance. When you're a manufacturing company, you balance, I've got x amount of overhead, I've got to look at where I'm at and the absorption of that business coming in versus the pricing in the marketplace out there that when you're in a depression, pricing is a big, big challenge. But I do see a little bit more disciplined or more disciplined from our customers. And I'm basically talking about when I look at direct competitors in things like some of the OCTG segments in Titan. So I think that's a positive. I know for us, we're planning on raising prices again in late this quarter on the Titan side and doing another round. And again, part of that is we need to get a better price. We need to stay ahead of inflation and all that type of stuff right there. But it's better now than it was definitely 6 months ago from every segment of the business, while there's well intervention, pick one. And steel input costs, all of those things are driving that as well. Like nobody wants to be stupid. -------------------------------------------------------------------------------- James Thompson, JPMorgan Chase & Co, Research Division - Analyst [15] -------------------------------------------------------------------------------- Okay. That's very good. Final one for me. Obviously, you talked about the kind of bullish outlook for pretty much all of the businesses at this point in time. Could you maybe translate that into a little bit more color from the sort of outlook for the second half of 2022? Where are you kind of comfortable at in terms of guidance, I suppose, for 2022? -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [16] -------------------------------------------------------------------------------- Well, it's a big guidance question that we always get. I think that we've talked about today, we're very comfortable with guidance out there and where the direction of where we're at right now. I'm very optimistic that it's going to -- we're going to continue to improve. As we have said, many of you we've talked to already and given some thoughts on that, but it is going to get better. The issues that we have is we don't know what's going to happen for the traditional slowdown period holiday season wise. We don't know if budgets are going to be exhausted at Thanksgiving, and we see a big downturn in December, I don't know. I don't think that's going to be the case. A lot of that because of the high level of private operators in the market there right now. But we're going to stay bullish, and that's about all I'm going to say on that right now. -------------------------------------------------------------------------------- Thomas Andrew Rands, Investec Bank plc, Research Division - Industrials Research Analyst [17] -------------------------------------------------------------------------------- Thomas Rands from Investec. I've got 4 quick questions. So I'll fire through them individually. First one, just on the back question around Titan's kind of growth outlook. You touched on the international opportunity and some of the challenges there. But can you give us an idea of roughly how much as a percent of Titan's business is international currently? And ideally, where you'd kind of like to see it in 5 years' time? -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [18] -------------------------------------------------------------------------------- I'd like to see it more. And currently, the first half of the year, Titan International business was $16 million, $17 million, up from about $13 million the prior half year period. And that's not -- when we count international, that's not Canada. So we consider Canada and North America. So this is non-North American business. -------------------------------------------------------------------------------- Thomas Andrew Rands, Investec Bank plc, Research Division - Industrials Research Analyst [19] -------------------------------------------------------------------------------- Great. Second question, just on -- you talked about reactivating some of -- some sites. Can you give us -- maybe a question more for Bruce, kind of a capacity utilization kind of number at the moment across the whole group, if you can or even in individual? -------------------------------------------------------------------------------- Bruce Ferguson, Hunting PLC - Group Finance Director & Director [20] -------------------------------------------------------------------------------- It's really depending on what facilities there, Tom. But we are seeing the measure that we use the measure was this time last year was down at 32%, 33%. That's based on our 24/7. We're now up over 40%. So we're seeing that figure pick up. A lot of different companies will use different measures. But we are seeing that traditionally. We're putting on, for example, as Jim said, 3 shifts into Holland. Another shift into Aberdeen and across The States as well. Trying to get machines is difficult. But the -- with the demand we have, yes, we are seeing that utilization pick up month-on-month. -------------------------------------------------------------------------------- Thomas Andrew Rands, Investec Bank plc, Research Division - Industrials Research Analyst [21] -------------------------------------------------------------------------------- Great. And just on that, where was that in the past? Has it ever been close to 100%? Or is that... -------------------------------------------------------------------------------- Bruce Ferguson, Hunting PLC - Group Finance Director & Director [22] -------------------------------------------------------------------------------- We never get there because you live there 24/7... -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [23] -------------------------------------------------------------------------------- You'll never be at 100%. So we always view it 24/7 because you always got maintenance, you're just never going to run it into the ground like that. -------------------------------------------------------------------------------- Thomas Andrew Rands, Investec Bank plc, Research Division - Industrials Research Analyst [24] -------------------------------------------------------------------------------- So the previous peak number would have been is 70s, 80s maybe. -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [25] -------------------------------------------------------------------------------- Probably not as high as that. No. -------------------------------------------------------------------------------- Thomas Andrew Rands, Investec Bank plc, Research Division - Industrials Research Analyst [26] -------------------------------------------------------------------------------- Just trying to guage where we are... -------------------------------------------------------------------------------- Bruce Ferguson, Hunting PLC - Group Finance Director & Director [27] -------------------------------------------------------------------------------- Just 50, 60 in capacity, yes. Even 40. -------------------------------------------------------------------------------- Thomas Andrew Rands, Investec Bank plc, Research Division - Industrials Research Analyst [28] -------------------------------------------------------------------------------- Third one, you mentioned organic oil recovery orders, and I saw a highlight recently -- headline recently about $2 million Hunting investment in OR. Can you just give us some a bit more detail on what you're seeing? And remind us where you are with the IP provider of that and the momentum. -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [29] -------------------------------------------------------------------------------- Well, here's the expert. I'm going to let Bruce answer because he's the... -------------------------------------------------------------------------------- Bruce Ferguson, Hunting PLC - Group Finance Director & Director [30] -------------------------------------------------------------------------------- Certainly, we have a really good relationship with our Titan partners. And it's Titan actually on the IP, not the Titan we've been talking about perforation, but Titan is a company that owns an IP. And we have secured a longer-term agreements with Titan team, with Canada team, but it will take us through the license agreement. We licensed IP. That's through to 2030. We've now extended territories as well into a number of key locations, which is great. And yes, so there has been good news on that front. Getting technology adopted in the industry is always difficult. We're really, really pleased to see that we've -- after 5 years, that we've now got North Sea -- offshore North Sea with CNOOC. It's a key win for us there, and that's where the actual purchase orders have been received. And then some fantastic, exciting trials that are going on all across the Middle East and Africa as well with some major national operators at the same time. So as the year develops, we will -- with some good initial results coming through there, and we hope that will continue and that will lead to further purchase orders in those areas as well. Really difficult to quantify in terms of pounds and pence at this stage and hopefully give you a better update in October. -------------------------------------------------------------------------------- Thomas Andrew Rands, Investec Bank plc, Research Division - Industrials Research Analyst [31] -------------------------------------------------------------------------------- Great. And finally, the acquisitions you've done in the to be coming through great on at the moment. What is the M&A pipeline looking like at the moment? What valuation expectations from sellers? Obviously, you've got a nice net cash balance sheet. How are you thinking about deploying your capital or where your capital at the moment? -------------------------------------------------------------------------------- Arthur James Johnson, Hunting PLC - CEO & Director [32] -------------------------------------------------------------------------------- Okay. So we have looked at a number of acquisitions over the last couple of years. It's really a story that I'll do it the same with my Hunting shares that I'm not giving away at GBP 2.50. Everybody went through the downturn. And everybody had impacted earnings in that period. And when you're trying to put a value on a business, it's pretty hard to do that with the history that we've had. We have looked at a number, for example, of non-oil and gas-focused acquisitions. I'd say a number. There's been a couple of them. We've had dialogue with them and their comment was let's talk again in 6 months, let's talk again in 9 months because I know I'm going to not get my full value out of this if we do a deal today. So there isn't -- I want to say is it's probably the weakest market that I've seen. Some other deals that we've looked at have not closed. I mean there's just a big gap there with expectations and what you could stand in front of a room full of you guys and say, "This is what I paid for these guys, right?" And that clarity will come back as earnings come back, as the whole world comes back to normal. But it's just been extremely difficult. And we don't want to be in a commodity business, right? I don't want to add -- I don't want to acquire, I've had these come by my desk. Here's X company, we do X commodity product. And by the way, we're only based in the Permian Basin. It doesn't fit our portfolio. It's not what we want to do going forward. So we're being very picky. We're being selective. As you mentioned, the last 2 that we did have been to me home runs because it's been technology, very unique. It's not a 3-bid in a buy business, and we're looking for more things like that.