Energy services firm Hunting (HTG) is in the midst of a transformation which we think continues to be underappreciated by the market. The company has historically been heavily reliant on US onshore rig activity and is coming to the end of a restructuring process aimed at rebuilding profit after a difficult period in the wake of the pandemic.

Evidence of its recovery should come through early in 2024 when it reports its 2023 results, and over the course of the next 12 months the company’s efforts to diversify into areas linked to the energy transition should also become more apparent. In our view this can drive a rerating of the shares from a little less than nine times 2024 forecast earnings.

An investor day in September saw the company make clear the business will no longer be so reliant on its flagship Titan product. This is a perforating gun used to penetrate wells in preparation for production and is mainly sold in the US. In 2019 perforating systems accounted for 37% of group revenue, but in 2023 this is projected at 30% of revenue.

Hunting’s new strategy, which will drive further diversification by geography and product, aims to deliver 15% EBITDA (earnings before interest, tax, depreciation and amortisation) margins by 2025, from the guided 10% to 11% for 2023, with further improvement to come by 2030.

The company hopes to generate $1 billion in free cash flow through to the end of this decade, which should offer plenty of scope for investing in the business and rewarding shareholders with dividends. The company already anticipates being in a net cash position as at the end of 2023.

Hunting sees multiple avenues for growth which should improve the predictability of earnings and result in a more generous valuation from the market.

At present, most of its revenue outside Titan comes from OTCG products (tubes used in oil and gas production) and subsea equipment and technology such as couplings to connect parts of machinery, production risers (the portion of pipeline extending from the seafloor to the surface) and hydraulic valves.

The company also makes electronic parts for the medical, defence and aerospace industries, and plans to bring its engineering expertise to bear in emerging areas like geothermal energy and carbon capture.

Out of a targeted $2 billion revenue in 2030, the company expects at least $250 million to come from energy transition work, and the overall expectation is 25% of its revenue will come from outside the oil and gas market by that date.

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