WOR Sees Strong Medium Term Revenue Growth

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WorleyParsons has seen a number of new contract win ahead of the release of its fiscal 2013 result on 14 August. The forecasts and AUD 23 fair value estimate are unchanged, but the new contracts underpin assumptions for strong medium-term revenue and earnings growth. A number of the contract wins are for multi-year terms, providing services to brownfield sites and operating assets under WorleyParsons’ “Improve” business stream.

WorleyParsons disappointed the market with a surprise fiscal 2013 earnings downgrade in May, mainly due to a slowdown in resources activity in Western Australia and slower-than-expected growth at its WorleyParsonsCord construction contracting business in Canada. New guidance was for net profit after tax (NPAT) to be in the range of AUD 320 to AUD 340 million, up to 7% below fiscal 2012 NPAT of AUD 345.6 million. Forecasts are at the bottom of this range given the continued deterioration in conditions in the mining sector and poor outlook for mining services businesses.

In the past few weeks, we have seen a number of mining services firms lower earnings expectations including Boart Longyear, Transfield Services, Emeco and Bradken. However, expectations are for  WorleyParsons to achieve a rebound in earnings in fiscal 2014, given the strong outlook for capital expenditure in the oil and gas sector and the absence of one-off costs associated with the downsizing of its Western Australian operations.

WorleyParsons’ recent contract wins is for the provision of brownfield engineering services for the operational phase of Chevrons’s Western Australian assets. There is an initial five-year term for the provision of a range of services under the “Improve” business stream with options to extend under the agreement. While financial details of the contract have not been disclosed, we consider this an important win as these are large assets (completion value of AUD 80 billion) with long operating lives. It also supports our long-held view that WorleyParsons is well-placed to win multi-year operational support, asset management and maintenance contracts as the current large scale global oil and gas projects complete and move into the production phase.

Worley is also involved in three of the four coal seam gas to liquefied natural gas projects in Queensland and in our view is likely to capture long-term work on some of these projects when they complete. We estimate around one-third of revenue is currently derived from recurring maintenance-style work under the “Improve” business stream. With the Chevron win and further wins as the current large-scale projects complete, we expect the number of “Improve” contracts to increase further and the share of revenue from these contracts to grow to closer to 40% during the next three to five years.

In the U.S., Worley Parsons was also awarded a contract to provide integrated project management services to an integrated gas-to-liquid and ethane cracker complex for energy and chemical company, Sasol. This is another significant project, with an estimated construction cost of USD 16 to USD 21 billion, and takes advantage of plentiful gas in the U.S.

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