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Worley's diverse earnings stream to withstand soft oil price

Lex Hall  |  13 Jul 2020Text size  Decrease  Increase  |  
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Spending in the oil and gas sector is tipped to rebound and global engineering services company Worley offers an attractively priced gateway for investors looking for exposure to the energy sector, says Morningstar.

Worley (ASX:WOR) is a leading global provider of professional services, such as engineering, procurement, and construction management, to the oil, gas, mining, power, and infrastructure sectors.

But it has undergone somewhat of a facelift since its acquisition in April last year of the energy, chemicals and resources division of Jacobs—a multinational technical professional services company.

Worley’s revenue stream now relies less on hydrocarbons and more on chemicals. As a result, its earnings on the whole are more stable and less volatile, says Morningstar senior equity analyst Mark Taylor.  

Competitive threats rule out a moat for Worley, but it is nevertheless attractively priced, trading at a 30 per cent discount to Taylor’s fair value estimate of $12.50.

The company, formerly known as WorleyParsons, is in reasonably good financial shape, Taylor says, and offers investors a yield of 6 per cent with low double-digit dividend growth potential.

And most recently, it increased its stake in TW Power Services to 100 per cent, which Taylor says reflects the company’s commitment to move towards renewable projects such as wind farms.

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“Worley remains a global leader in its field and at current prices we view the stock as an attractive option for investors seeking indirect exposure to the global energy sector,” Taylor says.

Taylor says that while the coronavirus and subsequent drop in oil price will curb Worley’s activity in coming months, there will be a rebound.

The market is pricing in a permanent decrease in capital expenditures relative to 2019 levels for the oil and gas sector—a forecast that Taylor disputes.

“We forecast capital expenditures in the global oil and gas sector to fall 17 per cent through to 2021 due to the coronavirus and weaker oil price, which will squeeze Worley’s pipeline in the near term,” he says.

“However, we think this will be a short-run issue and immaterial to our valuation. As of half-year fiscal 2020, approximately 20 per cent of Worley’s revenue is attributed to oil and gas capital expenditures projects and Worley recently reported that key customers in the upstream and midstream sectors have reduced near-term capital expenditures by 30 per cent.”

wind farm

Worley's acquistion of TW Power Services marks a shift towards renewable energy projects.

Taylor is also encouraged by the fact that Worley has contracts locked in, which will boost cash flows and he tips capital expenditure to rebound from fiscal 2021 to cater for pent-up demand.

He also forecasts the Brent oil price to increase from current lows of about $40 to $60 per barrel by mid-2022, which he expects will spur capital expenditures.

Oil prices climbed more than 2 per cent on Friday after the International Energy Agency boosted its 2020 demand forecast but record-breaking new coronavirus cases in the US soured expectations for a fast recovery in fuel consumption.

“The key risk for Worley is a significant and sustained fall in the oil price, which could lead to fewer projects and a downturn in capital expenditure in the global oil and gas sector, particularly on high-cost and alternative energy projects,” says Taylor.

“This risk is only partly mitigated by Worley's long-term relationships and global framework agreements with several global oil, gas, and petrochemicals firms. These agreements have provided Worley with a steady flow of work.”

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is senior editor for Morningstar Australia

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