These two oil stocks could still make you fabulously rich
Shareholders of Hunting(LSE: HTG) have been on a wild ride over the past five years. After peaking at 930p in 2013, the shares hit a low of 250p at the beginning of 2016 -- a loss of 73%.
However, over the past two years, the shares have recovered some of these losses. It looks as if there could be further gains on the cards as the firm's recovery continues.
Hunting's recovery from the lows is starting to pick up steam. Indeed, today the company told the market that it now expects revenue of $700m for full-year 2017, up from $456m for 2016. Even though this figure is still below the 2014 high water mark of $1.4bn, it's still an impressive turnaround.
Management also reports that Hunting has returned to positive EBITDA in the year to date. For the nine months to 30 September, EBITDA was approximately $33m. The group is now expecting to report a "modest" pre-tax profit for the full year (analysts had been expecting a pre-tax loss of £6.3m).
These figures indicate that Hunting is well on the way to recovery. And as trading continues to improve, I believe that this oil services company could generate huge returns for investors.
As Hunting has worked to remain profitable during the oil and gas downturn, the company has slashed costs. Improving margins has helped it stay solvent in the downturn, and will accelerate its return to profit as trading improves.
For example, since 2014 the group has reduced its headcount by 24% and decommissioned three manufacturing facilities and 10 distribution centres. At the same time, more efficient facilities have been opened to maintain the firm's presence in key markets.
As oil sector activity returns, I believe operational gearing should ensure Hunting's efforts pay off. While the shares might look expensive today, trading at 29 times forward earnings, if sales return to pre-2014 levels, earnings could grow five-fold from 13p to 65p. A multiple of 15 times would then give a share price of 975p according to my figures.
Strength in numbers
John Wood Group(LSE: WG) is in a similar position to Hunting in my view. The oil services company recently acquired peer Amec to help its efforts to diversify and improve economies of scale.
Wood has attracted plenty of criticism for this deal, not least because the enlarged group has been forced to shed businesses with £700m in revenues and more than 4,000 staff to meet competition concerns. This divestment has put management's cost savings target in jeopardy. Savings are now expected to be only £128m.
Nonetheless, I believe that this combination will pay off for investors. By combining, Wood and Amec can utilise their strengths to win contracts and beat the competition.
Analysts are downbeat, but much of this pessimism is based on the current state of the oil market. A recovery in oil activity (which already seems to be under way) will help the enlarged group return to growth.
Cost-cutting will help improve margins and a return to historical profitability should re-convince the market that this business is worth a second glance. Investors will be paid to wait for this recovery as the shares currently yield 3.7%.
Zero to a million
Hunting and Wood are well placed to grow as activity levels in the oil industry recover, which makes them look attractive to me.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.