Australia | Jun 06 2019
Brokers agree WorleyParsons is well placed to capture a large slice of work in global resources engineering but some concerns linger over the outlook for oil & gas.
-Upgraded synergy targets for Jacobs ECR acquisition
-Near-term growth in E&P engineering somewhat soft, customers cautious
-Excess low-cost gas in the US may be an opportunity
By Eva Brocklehurst
A diverse business mix has been further enhanced and WorleyParsons ((WOR)) is positioned to capture a greater amount of work as it integrates Jacobs ECR. Pending a smooth integration, the new scale will provide wide exposure, covering upstream oil & gas, chemicals and mining.
Brokers note the integration of Jacobs ECR is continuing to track ahead of expectations and there is upside risk from the acquisition from both the revenue and margin perspectives. Management has put further M&A on hold, a fact which pleases Ord Minnett, given a two-year integration program for Jacobs ECR.
Morgan Stanley points out Jacobs ECR has a history of refining work but is building a greater weighting in chemicals. While there was no guidance on refining capex, WorleyParsons expects chemical capex to grow at 3% to 2024.
Cost synergy targets for Jacobs ECR have been upgraded by 15%, with 60-70% of the synergies to be delivered in the first 12 months. This a good sign, in Macquarie's view, as it comes after only five weeks of ownership. The company has also highlighted the margin opportunity via shared services and global integrated delivery.
Revenue opportunities include the likes of the lithium project for Orocobre ((ORE)). Moreover, while WorleyParsons has no presence in Argentina Jacobs ECR does. Macquarie asserts, combining this with WorleyParsons' lithium expertise, this is a good example of the leverage available to the merged group.
UBS upgrades the stock to Buy as it now appears more attractive on a valuation basis, given the share price has fallen -15% over the last three months. The broker forecasts earnings (EBIT) growth of 96% in FY20 and 13% in FY21 supported by Jacobs ECR synergies.
While the backlog over the past six months has improved, and Morgan Stanley is unconcerned, there is the undisputed inference that industry activity is not surging ahead. This compares with 2017-18 whether backlog grew sequentially quarter by quarter. Meanwhile, there appears to be no momentum on WorleyParsons' four large receivables and the broker wonders whether some of this will be written off over time.
Ord Minnett assesses near-term growth is a little anaemic, while customers are cautious about the current macro economic environment. Nevertheless, the broker believes WorleyParsons can benefit from an improving cycle. Macquarie also notes a more measured pace of top-line growth, and the number of contract awards has slowed from very strong levels. Still the balance sheet is in good shape. Importantly the company's commercial model has not changed post the acquisition of Jacobs ECR, so the risk profile remains similar.
Citi expects the company to continue leveraging global delivery capabilities in India and China. In the medium term, earnings are likely to be softer as further capital expenditure is required for additional investment in the modernisation of systems.
Oil & Gas Outlook
WorleyParsons is leveraged to the global energy transition, yet expects significant increases in conventional oil & gas investment. Global primary chemicals production is also expected to increase materially, while higher metals and minerals production will lead to resources growth in renewable power and electric vehicles.
The main risk Morgan Stanley perceives is the deflationary outlook for oil & gas. This is driven by the resilience of shale production in North America, which is growing at close to the growth rates of global oil demand, and there is significant resources in place to underpin the trend. This also suggests OPEC (Organisation of Petroleum Exporting Countries) is ceding market share and this is rarely good for oil prices.
Morgan Stanley wonders whether countries outside of the US will consider lowering taxes on oil projects to compete for capital and notes, in terms of WorleyParsons, its upstream business has very little exposure to shale.
Macquarie highlights the multifaceted growth in petrochemicals, believing excess low-cost gas in the US creates opportunities. US shale as a petrochemical feedstock, albeit far away from markets in China, can be exported economically and Jacobs ECR has experience in a range of US crackers on the Gulf of Mexico coast.
UBS considers the global oil & gas cycle is in the early stages of a recovery and remains constructive on the medium-term outlook. Still, there is a high correlation of WorleyParsons shares with oil prices and this is a key downside risk. Downside risk comes with any deferral of energy expenditure as a result of oil price declines.
The main prize in the merger with Jacobs ECR is revenue, Credit Suisse asserts. The broker observes project and capital expenditure across resources is being moved out a little and it is unlikely WorleyParsons will lose its leverage to the oil price any time soon. Still, for items that can be controlled, the business appears well situated. Overall, Credit Suisse identifies the risks to the upside, albeit near-term catalysts are hard to identify.
Morgan Stanley alludes to management's frustration at the lower share price and agrees that the correlation to oil prices is unlikely to disappear quickly, as there are limited oilfield service companies in Australia, or even regionally, for investors. While envisaging some valuation upside, the broker maintains its Equal-weight rating.
FNArena's database shows six Buy ratings and one Hold (Morgan Stanley) and the consensus target is $18.32, suggesting 39.4% upside to the last share price. Targets range from $16.00 (UBS, Morgan Stanley) to $21.48 (Macquarie).
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