BUY HOLD SELL – Worley (ASX: WOR)
Worley (WOR) has come a long way since its start in 1893, an engineering company specializing in steam power. Its aim now is to deliver a more sustainable world and it is structuring itself to benefit from the current energy transition. It provides engineering, procurement and construction expertise to the upstream, midstream, chemicals, power, and mining and minerals sectors.
In 2018, Worley Parsons changed its name and bought Jacobs Engineering for $4.55bn. Management described the deal as an ‘opportunity enhancer’. One of the important outcomes of the deal was that it reduced the reliance on hydrocarbons like coal and oil to 52% from 75%. It is clear Worley still has strong indirect exposure to the energy sector but unlike Woodside (WDS) and Santos (STO) which have incredibly capital-intensive businesses given the cost of oil rigs and pipelines, Worley is a far more nimble business without the need for large capex to generate revenue.
The need for hydrocarbons in the global energy narrative isn’t likely to disappear in the near future. The global oil and gas industry requires more than $600bn of investment annually until 2030 to keep pace with the rising demand. Big underinvestment and the energy crisis caused by the Ukraine war have aggravated the supply-demand imbalance. It has also placed a bigger emphasis on the need for cleaner sources of energy.
To provide some perspective on the ‘energy transition’, Bloomberg estimates that clean energy investments from 2022 to 2025 need to annually triple the current 2021 spend, and then double from 2026 – 2030 to meet net-zero targets. Management sits comfortably in both segments that require that substantial investment.
While Worley still derives a large portion of its revenue from what it labels ‘traditional energy’ sectors its sales pipeline continues to see improvement in the number of sustainability-based projects.
Management now targeting revenue to be 75% sustainability-related in the next 5 years as it turns around preferences. The other encouraging element is sustainability-related projects have also been delivering better margins.
Worley’s investor day last week highlighted expectations for improved earnings to finish the second half of the year. The business remains on track to deliver $375m in operational savings by June next year. Growth in the order backlog and increased headcount are other positive comments. The increase in headcount can be viewed as a strong sign the company is entering a growth stage of the cycle. You wouldn’t be hiring a bunch of new workers if you had doubts about the outlook for your business.
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- ROE is not what you’d label as impressive at 5.2%. Its peer, Monadelphous (MND), sits on 12.4% so WOR is a bit behind.
- Worley sits on a PE multiple of 26.3x which is expected to fall in the next few years. Monadelphous sits on 23.3x.
- A gross yield of 3.2% is OK but below the market average of ~4.5%. Monadelphous has a gross yield of 5.1%.
What are the tailwinds?
- Clean energy investment is projected to rapidly grow to meet net-zero targets.
- Renewed focus on energy security and independence is accelerating low carbon energy investment.
- Traditional and sustainable energy sectors are growing across all regions. A robust pipeline of work affirms that trend.
- Policy support growing significantly across Canada, Europe and the United States. Since 2020, governments have committed US$4b specifically for Direct Air Capture which is a fancy way of saying carbon capture and storage.
- The chemicals market remains on track to experience one of the highest levels of material demand growth of all industrial sectors. The traditional chemicals segment makes up 29% of revenue with the sustainable chemicals segment pushing that revenue number above 30%.
What are the risks?
- A significant drop in oil prices would be expected to lead to a major cut in capital expenditure which in turn would put a cap on new projects in the oil and gas sector. The hydrocarbons sector comprises over 52% of Worley’s current operating revenue.
- Slowing global growth and the potential for black swan events particularly in China to crimp energy demand lingering concerns.
In the past 12 months, Worley has improved 21%, outperforming the ASX 200 by more than 19%. The share price has been in a solid uptrend since the end of November last year. 1500c has proven to be a significant level but it appears to have been more of a level of resistance than support. Momentum as indicated by the green ‘MACD forest’ has been slipping in the last few sessions but remains above the signal line which means you can still look at momentum as a glass half full. RSI is neither overbought nor oversold but is starting to tick lower. The big takeaway is that it is highly correlated with the oil price which means if the oil price tanks, so too will WOR. Expect that dynamic to slowly unwind in the next few years as its reliance on hydrocarbons diminishes.
Macquarie upgraded to OUTPERFORM at the end of April citing the redeployment of Russian oil and gas to other regions as governments imposed bans. Expects the US to lift investment in oil and gas as well as renewable energy to assist in self-security. Ord Minnett said LIGHTEN, not much colour was offered but the broker did present its oil forecasts with US$101/bbl in 2022, US$90/bbl in 2023 and US$90/bbl in 2024. Citi said BUY, citing margin improvement and increased investment in the oil and gas industry for the next few years. UBS said BUY with half-year performance surprising the broker. UBS said the focus on sustainability will require ~$100m investment spread over the next three years.
Chris Ashton is the MD and CEO. Chris joined Worley in 1998 and responsible for the integration of Jacobs ECR and the strategy for the transformed Worley business. John Grill is the chair with more than 40 years of experience in the resources and energy sectors.
Dar Al-Handasah known as Dar, is the biggest shareholder with a 22.64% interest. It is a privately-owned international engineering consulting company. Vanguard, Blackrock and Van Eck are some other well-known funds that feature on the top investor list.
Short interest of less than 2.5% is not what would fall into the category of concern.
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More about the author – Tom Wegner
Tom has been working at Marcus Today Stock Market Newsletter since 2016. He graduated from Monash University and is the author of the much-loved BUY HOLD SELL section of the newsletter. Tom has a natural curiosity in financial markets and is passionate about helping his peers become better investors.