Medium-term View

WorleyParsons provides consulting services across the engineering, procurement and construction, mining, chemicals and infrastructure sectors.

 

The company recently hosted an upbeat investor day, clearly focusing on the opportunities presented by the recent acquisition of Jacobs Engineering Group’s energy, chemicals and resources (ECR) division, and the positive outlook for the business.

 

The most material announcement was the increase in the cost benefits target from the Jacobs ECR acquisition (completed in April) to $150m from $130m per annum. Of this, 60–70% is expected to be achieved within the next 12 months. The cost of these benefits is estimated at $175m, including $55m of ‘modernisation’ capital expenditure.

 

On a sectoral basis, the integration of the new business has resulted in chemicals becoming one of WorleyParson’s largest exposures, with chemicals – including downstream refining in the hydrocarbon segment, now representing 43% of Worley’s sectoral exposure. Energy – including the power segment – makes up 47% and resources accounts for 10%.

 

Customers have exhibited some caution in recent months – particularly given the recent global trade dispute between the US and China – although Worley is leveraged to the global energy transition. Management outlined reasons to be positive on the outlook for the business, as it expects: 1) a significant lift in conventional oil and gas investment, which should drive the hydrocarbons business; 2) global primary chemicals production to increase materially; and 3) higher metals and minerals production to lead to resource growth in renewable power and electric vehicles. The company’s backlogs have stabilised, although staff utilisation levels continue to rise.

 

Management reminded investors that the Jacobs acquisition was announced after the AFW UK acquisition (completed in October 2017) had been fully implemented. With a two-year integration program for Jacobs, further M&A is likely now on hold. The company did point to a successful track record of acquisitions and said Worley would remain opportunistic in this area.

 

We see Worley as well positioned to benefit from the improving cycle, which could see strong earnings growth in the medium term, leading us to maintain our Buy recommendation and our $18.50 target price.

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