Australia | Jun 03 2021
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.
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.
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.