Worley Well Placed For A Sustainability World

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Worley has emphasised the longer-term energy transition in its investor briefing and believes it can win a substantial portion of this new work

-Sustainability services are a growing proportion of the bid pipeline
-Parts of traditional business under structural pressure
-Cost savings, revenue growth likely to drive better H2
 

By Eva Brocklehurst

Sustainability has become a password to the future for Worley ((WOR)) which intends to take advantage of work encompassed in contracts involving decarbonisation, resource oversight, asset maintenance and environmental consulting.

In its investor briefing the company has emphasised a longer-term energy transition outlook, expecting $128-469bn of addressable expenditure per annum to 2030 across these sustainability segments.

While differing slightly regarding the areas of importance in terms of energy transition, most brokers agree expenditure will be material and ramp up significantly, and Worley can capture a large share.

Worley expects environmental consulting on its own will grow to a $60bn market, with 50-75% of this readily accessible to its workforce. UBS highlights a track record in designing and delivering technically complex projects will stand the business in good stead, as there is significant scale with a global workforce of over 48,000 engineers and project services staff.

Furthermore, while sustainability services are only a small component of the current revenue mix, this is a growing proportion of the bid pipeline and tends to have a higher margin than traditional services.

Traditional Business

What about the main part of the business? Momentum in the awarding of projects is improving and sector capital expenditure is expected to increase in 2021 across the company's three main branches of work, while operating expenditure should also improve gradually as activity normalises post the pandemic.

Worley estimates expenditure for legacy power plants will be $70bn per annum with $5bn of this addressable until 2026. The company observes global oil companies are becoming, more generally, energy companies and still require traditional operations to be serviced.

Meanwhile, chemical customers are experiencing improved profitability and anticipate a V-shaped recovery in investment and a successful roll-out of vaccines in the US means more personnel-intensive projects are recommencing.

Refinery revenue, currently 15% of total revenue, is expected to shrink going forward because of structural refining overcapacity and a shift to electric vehicles. Hence, Macquarie points to aspects of the traditional business that are under structural pressure and while new sustainability opportunities offer a substitute this could come at some cost to traditional business.

Management did not provide explicit guidance but reiterated expectations for growth half on half in 2021 while cost savings are on track for $350m by June 2022. Macquarie assesses cost savings and constant currency revenue growth rather than the mix of business are the likely drivers of a better second half compared with the first.

The business is still experiencing some impact from coronavirus delays, notably in Canada and Latin America. Citi takes the opportunity to revise growth projections for the energy segment in FY21-25 because of strong oil prices, noting the segment comprises around 47% of revenue and the backlog has increased to $14.1bn as of the end of March, up 4% since December.

While many of the company's large customers are adjusting expenditure plans for the energy transition, Morgan Stanley believes the main risk is activity not materialising quickly enough. Yet the broker acknowledges oil prices are rising and assumes some incremental capital expenditure will occur in traditional markets of oil & gas.

ESG

Decarbonisation is the largest segment being targeted and Worley estimates investment of US$1.5 trillion per annum with an associated addressable market up to US$225bn.

Sustainability work involves emissions control, materials used in the energy transition such as copper, energy efficiency, electrification, decarbonisation infrastructure and, of course, renewable energy construction.

Energy transition and circular economy opportunities represent 23% of total sales factored into the pipeline, up from 11% in November. There is also improvements likely in the average gross margin because of the mix of work.

By assuming Worley can achieve a 5% share of the sustainability market, Macquarie crunches some big numbers, estimating a revenue opportunity equivalent to around current annual revenue of $9bn.

The broker notes more than 35 new offshore wind projects were awarded to Worley over the past 14 months and the sales pipeline is more than 10x the sales achieved in FY20. The company also won 40 projects over the same period for hydrogen and envisages a US$200bn addressable market by 2040.

Macquarie assesses higher commodity prices and a recovery in the global economy will lead to more projects being sanctioned along with improved confidence in the customer base. After a downgrade in February the broker suspects the stock has decoupled from the oil price and improved earnings and more contract wins are required to close the gap.

Morgan Stanley estimates the stock is trading in line with long-term averages and to justify higher multiples there needs to be a stronger outlook for the traditional business, or an indication that the energy transition is occurring quickly and leading to more earnings in the next 1-3 years.

Ord Minnett agrees with this assessment, noting that near-term risks exist in that exploration & production companies are yet to commit to large-scale growth. Worley is not considering major acquisitions but will focus on selective areas where it can add skill to its base.

While a little cautious regarding the pace of demand growth Citi does not believe an overly optimistic view on operations is required to construct a bullish case for the stock.

Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $15.60 target while the database has two Buy and four Hold ratings. The consensus target is $11.29, signalling 0.9% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 3.9% and 4.0%, respectively.

See also, Recovery Still On Offer For Worley on February 2, 2021.

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