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Sustainability Opportunity Beckons Worley

Australia | Dec 04 2020

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

Worley has concluded there are substantial opportunities in helping heavy industry reduce its carbon footprint, outlining a strategy to expand its share of environmentally sustainable projects

-Energy transition to increasingly drive earnings growth
-Worley to be a beneficiary of a global recovery
-Investors should be mindful of competitive pressures


By Eva Brocklehurst

A transition in energy production and the emergence of sustainable strategies among resources companies are shaping the outlook for energy sector contractor Worley ((WOR)), as a significant increase in capital investment is anticipated.

Management has concluded there are substantial opportunities for growth in renewable developments and green hydrogen, while highlighting its expertise in carbon capture & storage.

Worley plans to assist clients scale up renewable energy production and help heavy industry reduce its carbon footprint, briefing investors regarding its strategy to assist customers deal with carbon emissions targets.

This includes developing technologies that focus on electrification and energy storage. In the refining segment, Worley is helping customers develop biofuel refineries and green hydrogen plants.

Citi lauds the strategy, highlighting US colleagues have found investing in renewables has been the most successful contractor strategy over the past year, noting too that global peers are successfully moving into renewables and have meaningfully outperformed those companies that are still focused on legacy segments such as oil & gas.

Ord Minnett downgrades to Lighten from Hold as the stock appears expensive and consensus forecasts too optimistic. The broker assesses the environmental sustainability projects will not be a driver of income for some time. Also, projects are being still deferred, albeit none have been cancelled altogether.

Morgan Stanley agrees the process will not be quick but the company has commenced the journey and provided some benchmarks to monitor its progress. If Worley successfully demonstrates continued growth in these emerging areas the broker assesses potential for increased trading multiples.

Morgan Stanley has less conviction on which areas will provide the greatest growth in the short term although suspects offshore wind is the most likely, as Worley recently completed an acquisition in this area and the industry has been around for longer.

Goldman Sachs expects the energy transition will increasingly drive earnings growth and forecasts expenditure in this segment to reach 22% of earnings by FY25. The broker considers biofuel a meaningful opportunity, forecasting investment of US$265bn in 2025-30.

Starting Small

Worley has estimated that 3% of FY20 revenue came from energy transition expenditure which compares with 23% from LNG, 3.5% from environment & water and 2% from transition materials.

The company has factored in an increase in energy transition revenue to 11% to take account of the likelihood of projects going ahead and its expected win rate. Work expected to be won in offshore wind farm construction is estimated at $65bn from 2020-30.

Worley has flagged its support for the world's largest green hydrogen project and specifically highlighted renewable fuels and plastics recovery. The company has been involved in 60% of US renewable diesel projects and is currently designing the world's largest renewable fuel refinery conversion.

Macquarie expects Worley to be a key beneficiary of the shift to global cyclical and value stocks as the investor focus turns to an earnings recovery post a coronavirus vaccine.

Yet further contract wins in renewables are required to prove up the company's ability to capture a meaningful share of the opportunities. Cost cutting should support margins, the broker notes, although demand needs to improve in end markets for margins to actually increase.

Citi also suggests investors should be mindful of competitive pressures which it suspects management is understating. For example, the extent to which competition will increase as global oilfield service companies also pivot away from legacy contracts.

This brings up, in the longer term, the potential for Worley to become a takeover target, although the broker concedes speculation is premature at this point in time with just 5% of revenue directly emanating from renewables.


Citi also remains bullish on a rebound in activity as maintenance re-starts in the heavy industrial sectors that have been affected by the pandemic. The broker can envisage free cash flow yield approaching 12% by FY22 and net debt/operating earnings falling to 0.5x by the end of that period.

This should facilitate increased capital returns. As the company continues to integrate Jacobs ECR it has reiterated expectations for $190m of savings by April 2021.

UBS observes restrictions are still affecting access to some sites yet the company is managing its cost base to reflect a subdued operating environment. Personnel have been reduced by -5% since June 2020 and the company's workforce is now down -17% from pre-pandemic levels.

The stock has usually been influenced by the moves in the oil price, although UBS believes greater appreciation of the increasing diversity of end-markets should mean that relationship diminishes.

The broker expects oil and gas expenditure to decline by -30% should volatility in the oil price continue, pointing out that in the last price cycle decline oil & gas expenditure was reduced by -50%, with approximately half of that stemming from cost deflation.

Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, reiterates a Buy rating with a $15.70 target, expecting the stock will re-rate as the market better appreciates the growth trajectory.

The database has four Buy ratings, one Hold (Morgan Stanley) and one Sell (Ord Minnett). The consensus target is $12.66, suggesting -1.0% downside to the last share price. Targets range from $10.50 (Morgan Stanley) to $14.45 (UBS).

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