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Worley In Deep Water?

Australia | Oct 10 2017

This story features WORLEY LIMITED. For more info SHARE ANALYSIS: WOR

WorleyParsons is increasing its exposure to the maintenance, modifications and operations market with an acquisition in the North Sea.

-Acquisition multiple appears high, albeit strategic
-Could be justified by strong market position and relatively defensive earnings
-Improved outlook for oil & gas expenditure expected


By Eva Brocklehurst

After questionable outcomes from previous acquisitions,brokers suspect WorleyParsons ((WOR)) will be hoping its deep dive into the North Sea finds the pearl. The company has extended its maintenance, modifications and operations (MMO) business, with an acquisition which should provide a leading capability in a market that has a relatively small number of competitors.

The company has acquired the major component of Amec Foster Wheeler's UK business, AFW UK, for GBP182m. The business is being divested in relation to Amec FW's merger with John Wood Group as a remedy to competition concerns. The deal is valued at 8.9x sustainable earnings and increases WorleyParsons' exposure to the MMO market to 18% of sales versus 7% previously.

The company is raising $322m as part of a fully underwritten entitlement offer at $13 a share. Pro forma gearing will fall to 2.2x from 2.4x so brokers note there is an element of balance sheet repair.

Credit Suisse points to an attempt by WorleyParsons to acquire a strategic position in the North Sea previously, in Norway, without great success. Maybe, this time, things will be different. The broker finds it curious that the company is paying so much more in terms of the multiple for what is a forced sale, versus the 5.5x enterprise value/operating earnings (EBITDA) from historical deals. The positive aspect to this is that there is no question about the rationale for the owner disposing of the asset.

Value Addition?

This is a mature area of operations and core earnings are described as “stable”. Credit Suisse, in pondering the reliability of “stable” earnings, remains sceptical, given similar comments regarding the company's Improve business a few years ago, where estimated revenue has dropped in the past three years by more than $1bn.

While the deal acquires some balance sheet strength from a debt serviceability perspective, whether it adds value remains to be seen, in the broker's opinion. Credit Suisse considers the stock expensive and the price/earnings ratio for FY18 estimates of 24x excessive, given the uncertainties about the scale of the cyclical recovery and the company's positioning.

The multiple appears a little high to CLSA too but, in the context of the strategic benefits, strong market position and relatively defensive earnings it could be justified. Initially there seems little accretion, although the broker acknowledges this assumes no incremental synergies and that earnings are simply maintained, which may be a conservative interpretation.

WorleyParsons' multiple has started to look challenging but, as earnings are at a cyclical low point, CLSA remains positive on the stock. The broker, not one of the eight monitored daily on the FNArena database, has an Outperform rating and $14.50 target.

The transaction appeals to Deutsche Bank, as a forced seller's assets are being acquired at an attractive multiple. The broker believes management is being conservative regarding its forecasts of stable operating earnings, as this assumes no contracted continuation of capital expenditure-related activity. Morgan Stanley also envisages the transaction as opportunistic and consistent with the company's strategy to grow its MMO operations.

Global MMO

Macquarie observes the North Sea is relatively low growth and mature but should benefit from a gradual improvement in global oil & gas capital expenditure. The broker also expects the acquisition will deepen the company's customer relationships and provide an opportunity to leverage the Amec integrated MMO offering globally.

Macquarie acknowledges the company's track record on acquisitions is mixed but believes this was more about peak cycle timing than poor execution. The broker notes the company is beginning to witness a pick-up in activity from energy and resource customers but still considers the medium term revenue outlook uncertain, although there is an increasing backlog of work.

FNArena's database shows four Buy ratings and one Sell (Credit Suisse). The consensus target is $13.55, signalling -4.8% downside to the last share price. Targets range from $9.50 (Credit Suisse) to $16.47 (Deutsche Bank).

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