Does Hunting plc's profit warning spell good news for BP plc and Royal Dutch Shell plc?

The Motley Fool
Hunting plc well completion
Hunting plc well completion

A sign of the times


14:30 hours last Thursday wasn't a good time to be a holder of Hunting(LSE: HTG) the international energy services provider, which released a rather disappointing update following on from a profit warning released to the market on 13 April at the same time as the company's AGM.

Management reported that the weak performance experienced across the group's businesses in Q1 2016 had also extended throughout April and into May and was now predicted to continue over the next few months.

Given the further deterioration in market conditions, the company announced that the board had completed its latest review of the 2016 full year outturn, with management's revenue expectations now predicting a decline of between 30% and 40% compared to 2015, and with current market conditions, the outturn for the full year remained very uncertain.

However, along with a number of other market commentators, management anticipated that the trading environment would stabilise in the latter part of 2016.

As expected, and evidenced by the chart below, the shares took a further lurch down in trading during the remaining hours of Thursday and into Friday as the rest of the market caught up with the news from the previous day.

No pain, no gain

Despite the doom and gloom, as investors we should try to cut through the market noise and attempt to analyse what we actually know instead of listening too much to the news around us, which can often be both confusing and conflicting.

Turning to the next chart, we can see that the oil price has been recovering, and by digging a little deeper into the April update from Hunting we can see that management advised investors that the US rig count had declined to below 450 active units, down from over 1,800 units at the start of 2015, which reflected the difficult market environment being experienced by all energy sector companies.

So why is this good news for Shell and BP?

Well, it's true that there will be many people and businesses struggling right now in this sector, including the likes of BP(LSE: BP) and Royal Dutch Shell(LSE: RDSB), neither of whom have been immune to the price of oil collapsing - as evidenced by significant reductions in profits at both businesses over the last few quarters, not to mention the pressure being placed on the balance sheets.

However, as I've written before, there will be continued volatility in the oil price until the current over-supply issue is resolved, and one of the ways in which this issue can be resolved (while unpalatable for some) is by some producers being forced to stop producing oil. This in turn will mean less production, which in time should start to impact oil reserves, and in time the market should start to push the price of oil higher to a more sustainable level.

And for diversified sector players like BP and Shell that have weathered the storm, maintained the dividends and become leaner businesses by tightening cost controls, both upstream and downstream, the pain others endure will, in time, become their gain as oil recovers and stronger, leaner businesses emerge.

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.