Falling Oil Price Clouds Outlook For WorleyParsons

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This story features WORLEY LIMITED.
For more info SHARE ANALYSIS: WOR
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

As oil prices have more than halved in the past few months so too have the share prices of companies servicing the oil and gas sector been sold down.  WorleyParsons ((WOR)) is a perfect example. The company’s share price has slumped from more than $50.00 at the start of the year to $15.00 now as investors factor in a slower operating environment for the mining services group.

According to Credit Suisse, the sell-off in the stock has been overdone to some extent, as stocks in the sector globally are now trading on P/E (price to earnings) multiples of 8-9x when a multiple of 11-12x forward earnings is probably more appropriate.

Having said that the broker has downgraded the stock to Neutral from Outperform, as while the group’s investor day yesterday provided increased earnings certainty for FY09, some question remain with respect to earnings beyond that.

Citi agrees and given the combination of reduced earnings visibility beyond FY09 and the fact the oil price needs to be higher to justify the current levels of industry spending (it doesn’t see this as likely), it has cut its earnings estimates significantly in FY10.

The 37% cut to its forecast sees the broker’s earnings per share forecasts now at 156.3c this year and 128.7c in FY10, which is well below market consensus of 177.1c in FY09 and 188.4c in FY10 according to the FNArena database.

As an example, GSJB Were also attended the company’s investor day and left making no changes to its estimates, which call for EPS of 177.5c and 190.3c respectively, while Credit Suisse is at 179c and 201c.

One area where the company appears to have an edge and so may see less of an earnings impact than its competitors is in its project delivery and risk management systems, which GSJB Were rates as very good and which should allow the company to generate the maximum it can from its projects.

As well, the broker makes the point that in contrast to Citi’s view, the oil price is at present not having any impact on the group’s level of work in hand even though there is a slowing in the Canadian oil sands industry. This fits more into the view of Credit Suisse that the stock is oversold at present.

GSJB Were’s price target also supports this view, as post the investor day, the broker has not changed its target of $30.49, which is among the highest in the FNArena database. The database shows an average price target of $29.69, which is down from $34.29 prior to the investor day thanks largely to Citi’s price target being cut to $16.00 from as high as $37.00 in August.

In terms of ratings, the database shows a total of four Buys and six Hold recommendations. Today, shares in WorleyParsons are stronger in line with the broader market and as at 12.00pm the stock was up 49c or 3.4% at $15.00, which compares to a trading range over the past 12 months of $13.92 to $54.19.

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