Sustainability Opportunity Beckons Worley

Australia | Dec 04 2020

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.

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