Oil Lift Boosts Outlook For WorleyParsons

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WorleyParsons has indicated the resources industry has started to recover and expects a fair share of the work as customers reinvest in projects.

-Positive indicators emerging for O&G and resources projects
-2018 capital expenditure intentions still more than -40% below 2013 levels
-Strong growth in the backlog of work for the sector
 

By Eva Brocklehurst

The presentation from WorleyParsons ((WOR)) on the work flowing from its major oil & gas and resources customers was upbeat. The company is confident of winning a fair share of the work as the industry recovers.

Global oil & gas capital expenditure budgets were reported to be up 8% in 2018, although the flow to work and actual expenditure will lag. The company is witnessing increased front-end engineering & design (FEED) activity across a broad base and Macquarie suggests this is a positive leading indicator for future expenditure.

The broker believes the market will continue to back the company's recovery prospects, notwithstanding the uncertainty regarding timing. The main news, in Citi's view, was that staff utilisation and employment were up slightly across February-March.

Strategic priorities are now on onshore and offshore O&G and resources infrastructure. Chemicals, minerals & metals, refining and LNG are second order, while there is an increased focus on new energy and digital initiatives.

Citi found the annual investor briefing very useful, with management updating on the dynamics of the resources industry and the capital expenditure trends. WorleyParsons expects increases in global O&G capital expenditure in 2018-19 on the back of modest growth in oil demand.

Credit Suisse, on the other hand, would have preferred more financial data in order to get a better look at how the business is tracking and to underpin the qualitative outlook. The broker acknowledges the message is better than 2017 and higher oil prices are reinforcing capital expenditure plans, although budgets appear largely unchanged.

The company does expect more final investment decisions in FY19-20 to alleviate the expected supply gap in FY21-22. Nevertheless, Credit Suisse points out 2018 capital expenditure intentions are still more than -40% below 2013 levels.

Ord Minnett found increased justification for its positive view as capital expenditure forecasts suggest a marked improvement in the business cycle. The longer-term outlook may be even more positive once exploration & production companies commit to larger-scale growth projects.

Current E&P capital expenditure only reflects increased sustaining expenditure on projects to offset production declines, the broker points out. Management has highlighted that project development of more than 40mbpd will be required by 2040 to offset field decline and LNG demand is expected to catch up with supply by 2020.

Valuation

Macquarie notes the business, as well as its peers, traded at forward PE ratios of around 25-30x during 2007-08, reflecting the last peak in the share market and oil price. This also coincided with very strong growth in the backlog of work for the sector. The broker emphasises the link between PE multiples and growth in the backlog.

WorleyParsons does have a high level of debt amid a generally lower risk profile versus global peers and Macquarie envisages both financial and operating leverage via de-gearing and revenue-driven earnings upside.

Credit Suisse was disappointed that there was no quantification of net debt or gross margin and observes mining appears to be lagging O&G, despite an uptick in feasibility studies and a broad improvement across commodities.

In other news, Macquarie notes there is no material progress on the collection of $150m in outstanding receivables from state-owned into prices and, as an aside, the corporate backdrop continues to feature Dar Group, which has increased its stake over the last 12 months to 19.9%.

FNArena's database shows five Buy ratings and one Sell (Credit Suisse). The consensus target is $16.03, suggesting -5.4% in downside to the last share price. Targets range from $10.50 (Credit Suisse) to $18.50 (Citi).

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