REG - Hunting PLC - 2015 Full Year Results <Origin Href="QuoteRef">HTG.L</Origin> - Part 4
03/03/2016 07:10
- Part 4: For the preceding part double click ID:nRSC8677Qc
Our shareholders Our employees Our customers and suppliers The communities and countries in which we operate
Our Operating Activities and Product Groups
HUNTING'S SIX MAJOR PRODUCT GROUPS OIL COUNTY TUBULAR GOODS ("OCTG") PERFORATING SYSTEMS ADVANCED MANUFACTURING GROUP ("AMG")
HUNTING'S THREE MAIN OPERATING ACTIVITIES Manufacturing, Trading Manufacturing Manufacturing
OVERVIEW OCTG are steel alloy products and comprise casing and tubing used in the construction and completion of the wellbore. Hunting Hunting Titan manufactures perforating guns, energetics, firing systems and logging tools. Products are mainly used in the completion phase of a well. The production, storage and distribution of energetics is highly regulated and there are significant barriers for new entrants to the market. Hunting Titan mainly 'manufactures to stock' and hence uses a wide distribution network. Some manufacturing is done to order, including international telesales. This division includes the Hunting Dearborn business unit which carries out deep hole drilling and precision machining of complex MWD, LWD and formation evaluation tool components, and the Hunting Electronics division which produces printed circuit boards capable of operating in extreme conditions. The division works collaboratively with customers implementing their designs to their specification.
machines threads to connect OCTG using flush or semi-flush joints and can manufacture premium connections and accessories using
our own technologies such as SEAL-LOCKTM and WEDGE-LOCKTM. We are licensed to apply a variety of competitor thread forms and
generic API threads. We source OCTG products from a significant number of the major global steel producers and have strong, long
-term relationships in the US, Europe and Asia. Hunting trades pipe, which is a lower margin activity, to help support customer
relationships.
DIFFERENTIATORS Hunting is one of the largest independent providers of OCTG connection technology, including premium connections. Market leading position in the US.Strong portfolio of patented andunpatented technology. Hunting Dearborn is a world leader in the deep drilling of high grade, non-magnetic components. As a Group, Hunting has the ability to produce fully integrated advanced downhole tools and equipment, manufactured, assembled and tested to the customer's specifications using its proprietary know-how.
GLOBAL OPERATING PRESENCE Hunting has extensive machining capacity in the US, Canada, Europe, Asia and Africa.. Manufacturing centres in the US, Canada, Mexico and China. Distribution centres in the US,Canada, UK and Asia. US, Asia.
RELATED STRATEGIC FOCUS AREAS New products develop the full WEDGE-LOCKTM range, complete the production and test facility at Ameriport, US. Enhance existing Sales synergies - enhancing European distribution network. Develop global presence -developing sales organisationin Australia. New products - H-1 perforating system. Develop global presence - AMG facility established in Singapore. Enhance existing capacity - Dearborn campus expansion.
capacity, lean manufacturing - new threading facility at Ameriport, US. Develop global presence - establishing presence in
Africa.
RELATED PRINCIPAL RISKS Commodity prices, Shale drilling,Competition, Product quality. Commodity prices, Shale drilling. Commodity prices, Competition,Product quality.
HUNTING'S SIX MAJOR PRODUCT GROUPS DRILLING TOOLS INTERVENTION TOOLS SUBSEA
HUNTING'S THREE MAIN OPERATING ACTIVITIES Equipment Rental, Trading Manufacturing, Equipment Rental and Trading Manufacturing
OVERVIEW Rental of a large portfolio ofdownhole tools including mud motors, non-magnetic drill collars, vibration dampners, reamers and A range of downhole intervention tools including slickline tools, e-line tools, mechanical plant, coiled tubing and pressure control equipment. This business is capital intensive and results are dependent on asset utilisation and rental rates. Produces high quality products and solutions for the global subsea industry covering hydraulic couplings, chemicalinjection systems, specialtyvalves and weldment services.
hole openers. Tools are configured to the customers' specifications.This business is capital intensive and results are dependent
on fleet utilisation and rental rates. In limited instances rental equipment is sold outright.
DIFFERENTIATORS Leaders in progressive cavity, positive displacement mud motors. Hunting offers a comprehensiverange of tools, includinginnovative and proprietary technologies. For more than 30 years a provider of high quality metal-to-metal sealing hydraulic coupling solutions to operate in the harshest environments with a strong, long-term patent base.
GLOBAL OPERATING PRESENCE US. US, Canada, Europe, Asia,Middle East. US.
RELATED STRATEGIC FOCUS AREAS Cost control - closure ofCanadian operations in 2015. Develop global presence - developing operating presence in Africa, enhancing presence in Asia. New products - lightweightpressure control equipment system. New products - extreme high pressure / high temperature subsea tree hydraulic coupling.
RELATED PRINCIPAL RISKS Commodity prices, Shale drilling. Commodity prices. Commodity prices, Product quality.
Oil and Gas extraction focus on the Wellbore
· Well Construction
The well construction phase includes all activities related to setting up the infrastructure of the wellbore. Hunting
supplies OCTG, AMG and Drilling Tool products from this segment.
· Well Completion
Well completion is the process of initiating the flow of hydrocarbons to the surface. Hunting supplies OCTG and Titan
products from this segment.
· Well Intervention
Well intervention occurs while a well is in production to enable the flow to be maintained and to operate efficiently. In
this segment Hunting supplies intervention tools to be used downhole and provides hydraulic subsea equipment.
Our customers and channels to market
Hunting has a broad range of customers and a number of channels to market.
· Operators
Operators are the end consumers of our products and related services. These include National Oil Companies ("NOCs"),
International Oil Companies ("IOCs") and Independents. Approximately 30% of our sales are made directly to operators. Key
direct customers include Chevron, Apache and Maersk.
· Service Companies
Our primary route to market is via other service providers which generate c.60% of our revenue. These include "1st tier"
service companies who can provide project management services to the operators. Key customers include Halliburton, Baker
Hughes, Schlumberger and Weatherford.
· Steel Mills/Other
Steel mills are key suppliers to our business, however, in some circumstances we can perform threading services for them or
supply OCTG products. Other sales include oil and gas related sales through agents or intermediaries together with non oil
and gas sector sales made by our Trenchless, Dearborn and Electronics operations.
Our Operations and Markets
Our business need to be close to our customers and are therefore based in or near the main oil and gas producing regions.
US
$511.2mREVENUE 2,032AVERAGE EMPLOYEES The US is our primary market and has the broadest product portfolio. Our products are used both onshore and in the Gulf of Mexico. The US has the highest profitability due to benefits of scale, the impact of the Hunting Titan product lines and a higher use of proprietary technologies. Through the Hunting Titan acquisition in 2011 a broad distribution network is available and synergies are now being found with other product lines.
21OPERATING SITES 1,707kSQUARE FEET
22DISTRIBUTION CENTRES 302kSQUARE FEET
CANADA
$56.1mREVENUE 180AVERAGE EMPLOYEES The Canadian market is highly seasonal and can be impacted by prevailing weather conditions. Many oil and gas projects in the region are based on tar sands/heavy oil and have high break-even costs, therefore making the market sensitive to changes in global commodity prices.
1OPERATING SITES 96kSQUARE FEET
9DISTRIBUTION CENTRES 66kSQUARE FEET
EUROPE
$134.6mREVENUE 468AVERAGE EMPLOYEES Our European operations principally service the North Sea and are located in the UK, Netherlands and Norway. OCTG is the major product for the region and margins are impacted by the high usage of third party licensed threading technology in this market. This region has been at the forefront of developing our well intervention products.
8OPERATING SITES 206kSQUARE FEET
3DISTRIBUTION CENTRES 85kSQUARE FEET
ASIA PACIFIC
$90.1mREVENUE 565AVERAGE EMPLOYEES Asia Pacific is now our second largest region and we have operations in Singapore, China, Indonesia and Thailand. The region is now expanding from its OCTG base and is developing intervention tool and Hunting Titan product sales. Plans are in place to develop AMG capabilities.
7OPERATING SITES 530kSQUARE FEET
1DISTRIBUTION CENTRE 5kSQUARE FEET
MIDDLE EAST, AFRICA AND OTHER
$18.5mREVENUE 66AVERAGE EMPLOYEES We have an established operation in Dubai supplying well intervention tools and OCTG. We are expanding our operations in the Middle East through a joint venture in Saudi Arabia. We are also building a presence in Africa with operations being set up in South Africa and Kenya.
5OPERATING SITES 154kSQUARE FEET
Our Management Approach
DEVELOP OUR PEOPLEPeople are at the heart of our business.Our broad product portfolio demands experienced engineering and production staff crossing many manufacturing disciplines. Hunting has established regional training centres in North America and Asia Pacific to ensure its workforce is at the forefront of new industry developments.
EMPOWER OUR OPERATINGBUSINESS UNITSThe oil and gas industry is a fast paced sector where product requirementsand customer demands can operate on short lead times.Our business leaders are empowered to react quickly to local market conditionsas and when opportunities arise.
APPLY UNIFIEDOPERATING STANDARDS AND PROCEDURESDemanding safety and quality policies are developed centrally and then applied locally. We continually monitor and raise our operating standards.
MAINTAIN A STRONGGOVERNANCE FRAMEWORKThe Group's leaders and their teams operate within a tight framework of controls, monitored and directed at both a regional and central level and ultimately under the direction of the Board.
Our Business Strategy
Hunting's strategic priorities are based on a business model designed to deliver sustainable long-term shareholder value
while recognising our corporate responsibilities.
STRATEGIC PRIORITY STRATEGIC FOCUS AREAS 2015 PROGRESS
GROWTHOur aim is to continue to develop our global presence and supply a comprehensive range of products for use in the wellbore. We will grow through capital investment in existing businesses and through acquisitions. · Extend global presence.· Acquire complementary businesses.· Enhance existing capacity.· Develop new products. · New facility in Cape Town, South Africa, became operational.· Joint venture in Saudi Arabia established and trading commenced.· Expansion at Houma, US,
completed, to serve the Gulf of Mexico.· Final commissioning of premium connection and test facility commenced at Ameriport, US, in December.· AMG operation
established in Singapore.
OPERATIONAL EXCELLENCEWe operate in a highly competitive and cyclical sector which is high profile and strongly regulated. To be successful we must deliver high quality and reliable products and services cost effectively. · Leverage strong brand.· Enhance quality control.· Maintain operational flexibility.· Leverage lean manufacturing.· Increase strong relationships withcustomers and suppliers. · Global supply arrangements being negotiated with key customers.· Development of Hunting Titan H-1 perforating system which will increase safety and reduce on
site assembly times. · WEDGE-LOCKTM premium connections being sold in commercial volumes, additional sizes being developed. · Product catalogues rationalised and
consistent Hunting branding applied.
STRONG RETURNSIn normal phases of the oil and gas cycle our business has the capability to produce high levels of profitability, strong cash generation, growing dividends for shareholders and good returns on capital. · Introduce new and proprietary products.· Develop sales synergies.· Increase market share. · Maintain close cost controls. · Returns in 2015 were adverselyimpacted by the significant downturn in activity levels.· Cost reduction programmes have been implemented with staffing levels
reduced by 30% resulting in annualised savings.· Four operating sites have been closed as part of the rationalisation as new sites have become active.· Three
distribution centres are shortly to be closed within Hunting Titan as a result of the downturn.
CORPORATE RESPONSIBILITYWe are committed to act with high standards of integrity and to create positive, long-lastingrelationships with our customers, suppliers, employees and the wider communities in which we operate. · Retain experienced senior management team.· Skilled workforce.· Safe operations.· Protect the environment· Compliance. · Awards granted under HuntingPSP.· Implementing new legislative requirements.· Environmental initiatives implemented at new facilities.
Principal Risks
The Group's principal risks are identified below.
While we have presented these as separately identified risks, discrete events will often affect multiple risks and this is
considered by the Board when assessing the impact on the Group.
1. COMMODITY PRICES 2. SHALE DRILLING
MOVEMENT IN THE YEARHunting's exposure to this risk remains as high as last year due to the low activity levels as a result of low commodity prices. MOVEMENT IN THE YEARShale drilling activity has experienced a significant slowdown during 2015 due to the protracted decline in oil and gas prices. Consequently the Group's risk exposure increased during the year.
Nature of the riskHunting is exposed to the influence of oil and gas prices as the supply and demand for energy is a key driver of demand for Hunting's products. Oil and gas exploration companies may reduce or curtail operations if prices become or are Nature of the riskThe Group provides products to the oil and gas shale drilling industry. Although it is now an established industry in the US, significant sections of the public continue to view this activity as high risk and any consequent moratorium or new laws may unfavourably impact the industry. In addition, oil and gas produced from shale is a relatively expensive source of hydrocarbons. Consequently, shale drilling is more sensitive to a decline in commodity prices compared with conventional sources and is more likely to be curtailed (see the risks associated with commodity prices).
expected to become uneconomical and therefore continuation of prices above these levels is critical to the industry and the financial viability of the Hunting Group. Adverse movements in commodity prices may also heighten the Group's exposure to the risks
associated with shale drilling (see the risks associated with shale drilling).
Controls & actionsWorking capital, and in particular inventory levels, are closely managed to ensure the Group remains sufficiently adaptable to meet changes in demand. The Group maintains three operating platforms: the Well Construction and Well Controls & actionsThe Board monitors public and political opinion and maintains an awareness of the potential for changes to legislation especially with regard to the US where the Group is mainly exposed. The Group maintains a diverse portfolio of products that extends beyond supplying the shale drilling industry, including products for conventional drilling and the manufacture of high precision and advanced technology components for both the onshore and offshore markets. Many of the Group's facilities have the flexibility to re-configure their manufacturing processes to meet a change in the pattern of demand.
Completion segments expect tobenefit when exploration companies are active in their drilling operations and the Well Intervention segment benefits when wells are subject to maintenance or require testing or repair work. The decline in oil and gas prices
over the last 18 months has impacted the industry worldwide. Management has sought to mitigate the impact by introducing a number of cost reduction programmes throughout the Group and continues to adapt the business to meet new challenges generated by the
current trading environment.
3. COMPETITION 4. KEY EXECUTIVES
MOVEMENT IN THE YEARDuring the year, the Group's competitors did not introduce new products or processes or open new sites that would threaten Hunting's local operations. However, due to the tough trading conditions, competitors have submitted to customer MOVEMENT IN THE YEARChanges have arisen during 2015 at the senior management level with all vacated positions being filled by competent individuals who are anticipated to proactively contribute to the success of the Group. Due to the small turnover of key personnel, the Board has assessed the risk of losing key executives as unchanged from last year.
pressure and have reduced prices, often substantially. This has increased pressure from Hunting's own customer base and pricing has been amended in local markets. Consequently this risk has heightened during the year.
Nature of the riskThe provision of goods and services to the oil and gas drilling companies is highly competitive. In current market conditions there are considerable pressures to reduce prices. Competitors may also be customers and/or suppliers which can Nature of the riskThe Group is highly reliant on the continued service of its key executives and senior management, who possess commercial, engineering, technical and financial skills that are critical to the success of the Group.
increase the risk of any potential impact. Technological advancements in the oil and gas industry continue at pace and failure to keep ahead will result in lost revenues and market share.
Controls & actionsHunting has a number of high specification proprietary products that offer operational advantages to its customers. The Group continually invests in research and development that enables it to provide a strong product offering and Controls & actionsRemuneration packages are regularly reviewed to ensure that key executives are remunerated in line with market rates. External consultants are regularly engaged to provide guidance on best practice. Senior management regularly review the availability of the necessary skills within the Group and seek to engage suitable staff where they feel there is vulnerability.
technological advancement. Hunting's operations are established close to their markets which enables the Group to offer reduced lead times and a focused product range appropriate to each region. Local management maintains an awareness of competitor pricing
and product offering. In addition, senior management maintains close relationships with key customers and seeks to maintain the highest level of service to preserve Hunting's reputation for quality. The Group has a wide customer base that includes many of
the major oil and gas service providers and no one customer represents an overly significant portion of Group revenue.
5. HEALTH, SAFETY AND THE ENVIRONMENT("HS&E") 6. GEOPOLITICS
MOVEMENT IN THE YEARThe Group experienced a small number of minor HS&E incidents in the year, which is significantly below the industry average and is similar to the Group's record in prior years. The risks associated with HS&E have therefore not MOVEMENT IN THE YEARDue to the Group's already strong presence worldwide, the start up programme in Africa has not had a noticeable impact on the Group's exposure to geopolitical risk.
materially changed.
Nature of the riskDue to the wide nature of the Group's activities it is subject to a relatively high number of HS&E risks and the laws and regulations issued by each of the jurisdictions in which the Group operates. The Group's exposure to risk therefore Nature of the riskThe locations of the Group's markets are determined by the location of Hunting's customers' drill sites - Hunting's products must go where the drilling companies choose to operate. To compete effectively, Hunting often establishes a local operation in those regions, however, significantly volatile environments are avoided. The Board has a strategy to develop its global presence and diversify geographically. Operations have been established in Asia Pacific, Middle East and Africa recognising the high growth potential these regions offer. The Group carefully selects which countries in these regions to operate from, however, these operations will face a higher economic and geopolitical risk than the established businesses in North America and Europe.
includes the potential for the occurrence of a reportable incident, the financial risk of a breach of HS&E regulations and the risk of unexpected compliance expenditure whenever a law or regulation is renewed or enhanced.
Controls & actionsThe Board targets to achieve a record of nil incidents and maintains a policy of full compliance with the laws and regulations in each jurisdiction in which the Group operates. Every Group facility is overseen by a health and safety Controls & actionsAreas exposed to high political risk are noted by the Board and are strategically avoided. Management and the Board closely monitor projected economic trends in order to match capacity to regional demand. In order to mitigate geopolitical risk arising from the Group's current expansion programme in Africa, the new facility in Mombasa, Kenya, is to be jointly operated in partnership with a locally established business.
officer with the responsibility for ensuring current and newly issued HS&E standards are complied with. The Board receives a Group HS&E compliance report at every Board meeting.
7. INVESTMENT 8. PRODUCT QUALITY
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