Investments: Hunting has bought the right tools to drill into new markets

 

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Hunting

OUR VIEW: BUY

SHARE PRICE: 666P (-33P)

 

Hunting continued its strategy of expanding its offering through acquisitions yesterday, with the takeover of Specialty Supply. The oil services firm agreed to buy the Texas-based maker of precision-machined drilling parts for a cool $31m.

Dennis Proctor, chief executive, said the deal builds on earlier acquisitions this year, as the group looks to provide a broad and deep range of services to aid the extraction of conventional and unconventional oil and gas reserves.

Shale gas represents a particular opportunity for Hunting, especially after the recent announcement by Cuadrilla Resources that it was sitting on far higher reserves in the Blackpool area than previously anticipated.

Cuadrilla's findings have given rise to hopes that the UK could be sitting on decades' worth of shale gas, eclipsing even Poland's reserves, which were thought to be Europe's biggest hope in this particular area.

The deal is the latest in a series of bolt-on acquisitions. In August, Hunting acquired Titan for $775m in cash, positioning the company to take advantage of soaring shale gas extraction in the US and Poland, as well as the UK.

Later the same month, Hunting announced the $83.5m purchase of Dearborn Precision Tubular Products, a maker of components for the oil and gas sector, which also services the aviation and medical markets.

Yesterday's takeover is smaller but nonetheless welcome, further building its capability. The $5.5m (£3.4m) pre-tax profit Specialty reported in 2010 will have added about 10 per cent to Hunting's bottom line – based on Hunting's £38.5m profit last year – though the deal could well end up boosting it by far more over the years.

Hunting said yesterday it expected the deal to be "earnings-enhancing in the first full financial year before acquisition costs and normal acquisition adjustments such as fair-value adjustments and amortisation of tangible assets". With the price of oil and gas set to remain high and unconventional drilling all the rage, Hunting's future looks pretty good.

 

Charles Taylor Consulting

OUR VIEW: SELL

SHARE PRICE: 130P (-14P)

 

Some fund managers have a rule requiring them to dump companies that issue profit warnings because all too often they are followed by another a few months later. Then another.

Occasionally, though, profit alerts mean you can pick up sound businesses that have simply run into a sticky patch cheaply. Where, then, does Charles Taylor Consulting fit in?

Yesterday's trading statement wasn't exactly cheery, to say the least. Results between July and October have been in line, but they will come up short of expectations over the full year.

The business is focused on the insurance sector, providing a variety of services, including managing run-offs of closed companies and overseeing "captive" insurers where companies, or groups of companies, self-insure.

But the insurance sector as a whole is being strangled by red tape hailing from Europe in the form of the Solvency II Directive from Europe. So costs are up and trading is tough. It's not going to improve any time soon, given the deteriorating economic outlook.

In March, we said buy at 140p, not least because, on a rating of about eight times forecast full-year earnings, the shares looked keenly priced. They aren't far off that level now but with expectations being cut, that rating will rise.

The group is looking at how it can grow more profitably, but this may require investment. There's no hint that this will require capital but the statement was woolly. While we don't necessarily see a string of profit warnings coming from this company, there's too much to be taken on trust to see it as a bargain. Take out some cover: sell.

 

Office2office

OUR VIEW: HOLD

SHARE PRICE: 148.5P (-10.5P)

 

We bought into office2office in March. The office-products supplier had just issued an encouraging update and boasted an undemanding valuation.

Since then, the stock has moved up. But yesterday, the firm saw its shares fall back by more than 6 per cent after warning that the the trading result for the full year would be below expectations. The reason is essentially one of timing. Office2office is the sole provider of office supplies under the largest government office-supplies contract in history.

This is good but the contract came into operation in early October. But some departments had made their own arrangements before the sole-supplier model was implemented. This means that initial volumes for office2office have been lower than expected.

There does not, however, seem to be any change in the long-term picture. Sales should pick up in due course. And the private-sector business is doing well.

Still, concerns about the timing could hit sentiment (we do not know the exact impact on the full-year result). This means that while we would not sell, we would lower our recommendation until we have full details on the impact.

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