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Stockwatch: WorleyParsons Ltd (WOR)

February 25th, 2013 · David Dittman · 1 Comment

WorleyParsons Ltd (ASX: WOR), in line with a recent theme, announced–on the same day it revealed results for the first half of fiscal 2013–a new contract award, this one to provide engineering services at the Fort Hills oil sands project. The work, which will begin immediately, will generate AUD140 million of revenue for WorleyParsons. Fort Hills is jointly owned by Suncor Energy Inc (TSX: SU, NYSE: SU), Total SA (France: FP, NYSE: TOT) and Teck Resources Ltd (TSX: TCK/B, NYSE: TCK).

The fact that the company continues to consistently win new business from and renew contracts with the world’s biggest energy and resource companies supports WorleyParsons’ investment case. Although the challenges presented by economic uncertainty have impacted the stock, as a going concern WorleyParsons is getting stronger.

Management has introduced initiatives that should arrest and reverse a recent deterioration in margins, the balance sheet positions the company to grow and it clearly has the confidence of those companies that are driving development of energy and resources around the world.

That WorleyParsons surpassed guidance and expectations with its fiscal 2013 first-half report bodes well for the remainder of the year and for its long-term wealth-building capabilities.

Recently, management announced the third dividend increase since our initial recommendation, bumping the interim payout from the AUD0.40 announced last Feb. 29–which itself represented an 11.1 percent increase from the fiscal 2011 interim rate–to AUD0.415.

This 3.8 percent increase follows the 2 percent increase–from AUD0.50 per share to AUD0.51–announced last July along with fiscal 2012 full-year results.

Aggregated revenue rose 14 percent to AUD3.879 billion. Earnings before interest and taxation (EBIT) was up 2 percent to AUD252 million. Net profit after tax (NPAT) was up 2 percent as well, to AUD155 million. Operating cash flow, meanwhile, surged 95 percent to AUD125 million.

EBIT and NPAT margins, however, continued their respective five-year downtrends. Management has implemented a “local/global” strategy–“local delivery, global support”–that should start showing up in margin improvements during the second half of fiscal 2013.

Basic earnings per share (EPS) were AUD0.63, up 2 percent, and, based on the AUD0.415 interim dividend, made for a payout ratio of 65.9 percent.

Workshare hours were up to 2.9 million in the first half of fiscal 2012 from 2.1 million in the prior corresponding period. Management reported minimal impact from foreign exchange effects, while, global support costs were flat at approximately 4.5 percent of aggregated revenue.

During the period WorleyParsons won a total of 61 “significant and long-term contracts,” 12 power projects, 13 infrastructure and environment projects, 17 hydrocarbons projects and 19 minerals, metals and chemicals projects.

The group won 19 new contracts and six renewals under its “Improve” initiative. WorleyParsons currently has 275 such “Improve” contracts on the books, and management notes that demand continues to increase. This business line involves work on major projects for long-term clients, including the upgrade, de-bottlenecking and maintenance of existing operations, project portfolio management and support services to sustain assets and improve business performance of brownfield operations.

Hydrocarbons was the primary driver of EBIT growth during the period. The segment generated sales of AUD2.672 billion, up 14 percent, and accounted for 69 percent of the company’s overall revenue. Hydrocarbons EBIT was up 11.9 percent to AUD301 million, while margin ticked down 0.2 percent from the prior corresponding period to 11.3 percent.

Management noted a “high level” of unconventional oil and gas development activity around the world, noting particularly the Canadian oil sands and US natural gas markets as key areas driving growth in the recently concluded period and in future.

Low natural gas prices in North America are driving a significant level of downstream opportunities, including construction of processing facilities for fuels. The Canada-based WorleyParsonsCord fabrication and construction business is also enjoying significant growth.

During the period WorleyParsons won new business from Chevron Corp’s (NYSE: CVX) North Sea Ltd venture for front-end engineering design (FEED) work at the offshore Rosebank field. BP Plc’s (London: BP/, NYSE: BP) and PetroChina Co Ltd’s (Hong Kong: 857, NYSE: PTR) venture with the State Oil Marketing Organization of the Republic of Iraq tied up the firm for engineering, procurement and management services at the Rumaila oil field development.

The Saudi Arabian Oil Company hired WorleyParsons for general engineering and project management services, while LukOil OAO’s (Russia: LKOH, ADR: LUKOY) Mid-East Ltd signed a contract for project management as well as technical and construction management at the West Qurna-2 oil field in Iraq. Singapore LNG Corp will use WorleyParsons for FEED work on the liquefied natural gas (LNG) regasification project expansion in Singapore.

As for the “Improve” initiative as it relates to Hydrocarbons, CNOOC Ltd (Hong Kong: 883, NYSE: CEO) and Royal Dutch Shell Plc (London: RDSA, NYSE: RDS/A) engaged WorleyParsons for engineering work at an existing site in China. Japan’s Inpex Corp (Japan: 1605, OTC: IPXHF, ADR: IPXHY) and Canada’s Talisman Energy Inc (TSX: TLM, NYSE: TLM), Husky Energy Inc (TSX: HSE, OTC: HUSKF) and Canadian Natural Resources Ltd (TSX: CNQ, NYSE: CNQ) also signed deals for ongoing brownfield engineering services.

All this work supports management’s observation that major international energy exploration and production companies have announced increased capital expenditure commitments for calendar 2013.

Favorable economics are driving gas utilization and oil production projects in the US, and WorleyParsons sees a “high number” of greenfield as well as brownfield opportunities there and around the world. “Improve” is on track to boost its market presence due to the number of aging energy assets at work as well as increasingly stringent regulatory requirements that demand improved efficiencies.

In short, management expects to see improved Hydrocarbons earnings for fiscal 2013.

Minerals, Metals & Chemicals posted 21 percent revenue growth in the first half of fiscal 2013, 12 percent of overall company revenue. EBIT was up 5.1 percent, though margin declined by 2.3 percent to 14.5 percent.

Volatile iron ore and coal prices have had an impact on mining activity, though diversification has helped steady the ship with work in the developing world. The unit is also seeing significant growth in chemical-related work in China, the US and Latin America.

Key new contract wins include work with AngloGold Ashanti Ltd (South Africa: ANG, NYSE: AU) at the Gramalote gold project in Colombia, Pacific Aluminum Ltd for the Katherine-to-Gove gas project in Australia and Potash Corp of Saskatchewan (TSX: POT, NYSE: POT) for underground expansion work and project management at mines in Canada.

BHP Billiton Ltd (ASX: BHP) has engaged WorleyParsons for an “Improve” contract at the Escondida copper mine in Chile, while Xstrata Plc’s (London: XTA, OTC: XSRAF, ADR: XSRAY) Canadian unit is looking for improvements in its nickel operations.

Management expects the unit to post “improved” earnings in fiscal 2013 over fiscal 2012, driven by an improving near-term outlook for iron ore and metallurgical coal. Developed-market customers’ capital spending programs are focused on boosting productivity, which bodes well for the long-term health of the “Improve” initiatives for this unit.

The Infrastructure & Environment unit posted 6.4 percent revenue growth to AUD420 million, about 11 percent of overall revenue. EBIT declined 18.4 percent to AUD45 million, while margin compressed by 3.3 percent to 10.8 percent.

WorleyParsons continues to be the engineer of choice for oil and gas producers seeking increasingly complex environmental studies that are prerequisites for exploration projects around the world. At the same time, growth in unconventional gas exploration has led to more opportunities for customized infrastructure solutions.

The company is also seeing a lot of restoration activity, as long-lived fields are exploited using newly developed technologies. It’s also helping transport companies improve and make safer the movement of hydrocarbons by rail. Increased global competition for water is also boosting demand for WorleyParsons’ services.

The unit signed six contracts for new work during the period, with companies including refiner Caltex Australia Ltd (ASX: CTX) and global mining giant Rio Tinto Ltd (ASX: RIO).  Seven “Improve” awards and renewals were announced, with companies including Enbridge Inc (TSX: ENB, NYSE: ENB) andWoodside Petroleum Ltd (ASX: WPL).

Management expects fiscal 2013 earnings for the unit to be in line with fiscal 2012.

Power segment growth was hampered somewhat by a cloudy outlook for North American economic growth, while the termination of a large, government-funded nuclear project in Europe also dragged on performance.

Revenue for the segment was up 16.5 percent to AUD303 million, about 8 percent of overall revenue, while EBIT, helped by one-time items, surged 11.7 percent to AUD31 million.

Key resource-related projects haven’t been impacted by the slowdown in mining investment in Australia, however, and the company has a strong foundation for growth in the Australasian operations and maintenance market. Construction of new nuclear plants and safety upgrades to existing facilities will drive future growth.

New projects for the unit include site development and licensing and permitting services for a Polish nuclear power plant, plant outage and support services for multiple fossil-fuel facilities within the Tennessee Valley Authority in the US and consulting services for the Akkuyu nuclear power plant in Turkey.

WorleyParsons will contribute “Improve” services to help Bruce Power–a venture that includes, among others Cameco Corp (TSX: CCO, TSX: CCJ) and TransCanada Corp (TSX: TRP, NYSE: TRP)–maintain its nuclear facilities in Canada. It’s also been engaged to provide engineering and programming support to the US Dept of Energy’s National Nuclear Security Administration and to assess the operational safety of the Kozloduy nuclear plant in Bulgaria.

Management expects the Power segment to post “improved” earnings in fiscal 2013. The medium- to long-term outlook outside the US remains strong.

In the US the unit will see growth in “Improve” business for the maintenance of fossil-fuel facilities.

Outside the US growth will be driven by new nuclear plant construction in emerging markets, including Latin America, Southeast Asia, Sub-Saharan Africa and the Middle East, while “Improve” work will also be in demand for safety upgrades to existing facilities.

Management noted in its first-half earnings presentation that markets for its services improved toward the latter half of the period and forecast “growth” for fiscal 2013 over fiscal 2012.

Management had previously indicated that growth would skew toward the second half of the fiscal year.

WorleyParsons’ balance sheet is strong. The company’s gearing (or debt-to-equity) ratio as of Dec. 31, 2012, was 20 percent, in line with the figure at the end of fiscal 2012 and down from 26 percent as of Jun. 30, 2010. WorleyParsons has used 55 percent of its availability debt facilities; its average cost of debt is down to 5.5 percent from 5.7 percent and its average maturity has extended to 4.2 years from 3.8.

Interest cover–or the multiple of EBIT to interest expenses–was a healthy 12 times, while the net debt-to-EBITDA ratio held steady at 0.8 times, which is down from 1.2 times at the end of fiscal 2010. Ample liquidity of AUD1.193 billion leaves the company in good position to support future growth.

Macquarie raised the stock to “outperform” following the release of fiscal 2013 first-half earnings, bringing WorleyParsons’ buy-hold-sell line among analysts to six-six-three.

The stock hit a post-recommendation high on March 23, 2012, of AUD29.86 on the ASX. It traded as low as AUD22.31 on Dec. 11, 2012, as the outlook for the global economy and for energy and resource development was still colored by worries about the US fiscal cliff and the condition of the Chinese economy.

Those concerns have abated, but the stock’s drift to its lows illustrates well what can happen when sentiment swings to the bearish. For more Aussie picks, see our Top 5 Australian Dividend Stocks report.

David Dittman is co-editor of Australian Edge and MLP Profits and a regular contributor on Investing Daily. David also holds a  juris doctor degree from Villanova University School of Law. He can be followed on Twitter via @ddittman.

The information contained in this website is for general information purposes only and is not intended to act as any form of investment advice. All readers are urged to think carefully before making any investment decision. If you feel in need of help in terms of making investment decisions, then please seek reliable, honest and professional financial advice.

1 response so far ↓

  • 1 Greg Atkinson // Mar 5, 2013 at 11:15 am

    Here is the 5 year closing stock price charts for WorleyParsons

    WorleyParsons 5 Year Chart

    A larger version of this chart is available in the stock charts area.

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