Putting faith in Hunting to do the right deal

By This Is Money
Updated: 06:51 EDT, 6 September 2009

Andy Brough, fund manager at Schroders, says investing in oil services should be profitable over the next few years.

•• Don't forget, you can put your investment questions to Andy at askandy@financialmail.co.uk.

The management of oil services business >Hunting came into the office this week. It is always good to catch up with its chief executive, Dennis Proctor, who has strong views on the oil market that are always worth listening to.

Four years ago he told me that, at that time, one in four barrels of oil produced went to the US, but by 2015 one in four would go to China. The main reason was car ownership: then there was one car for every

two Americans and only one for every 70 people in China.

You could look at that suggested increase in consumption in two ways - either that the cars in the future would be very big or there would be a lot more of them to transport people about.

Car ownership in China has now soared and so has the oil price.

Hunting is involved in both the oil and the natural gas markets. These two markets used to have a very close relationship, with the oil price normally six times the natural gas price. Given that the gas price is currently about $2 per million btu (British thermal units) and the oil price is $70 a barrel, it is clear that this relationship has broken down.

Oil is very much a global market while gas is a regional one. In America, the collapse in industrial production has seen demand for gas slump. The country has nearly a year's supply in storage and there has been a 56 per cent decline in rig activity in the US market.

Key to Hunting's future is how to spend the near £400 million in cash raised with the sale of its Canadian business. With oil and gas prices significantly down from last year's peaks the profitability and prospects for companies providing services to these two industries has come under pressure.

Hunting is no exception, but with its cash-rich balance sheet it can take advantage of distressed businesses that took on too much debt during the good times.

One area Hunting wants to expand is subsea exploration. You only have to have heard last week's news that BP drilled the equivalent height of Everest in the Gulf of Mexico to find a jumbo field to see where the industry is going.

On the face of it, Hunting's shares do not appear cheap because of the slowdown in rig activity and the fact that it is earning virtually nothing on its cash. Anyone buying the shares is backing the management team to do the right deal at the right price. The backdrop for energy prices looks favourable for producers rather than consumers, especially as oil and gas reserves are displaying higher decline rates.

I last bought the shares a couple of weeks ago at about 460p and I will wait for them to drift back near to this level before I add to my holdings.

Investing in oil services companies should be profitable over the next few years.