As commodity prices have tumbled over the past 12 months, so have the share prices of mining services providers. Whilst more than just a mining service provider, WorleyParsons Limited (ASX: WOR) has not escaped a sharp decline in its share price.
WorleyParsons is 50% off its year high, and trading at levels close to 10-year lows. The decline in commodity prices, the decrease in capital expenditure in the oil and gas industry, and a profit downgrade have all contributed to negativity around the stock.
WorleyParsons has not been resting on its laurels though. It has been active in reducing costs and realigning its business to meet current market conditions. In May this year, it announced it was cutting 2,000 jobs, on top of the 4,000 jobs it had already cut during the preceding 18 months. And 12 months before that, it reorganised its business into three lines – Services, Major Projects, and Improve – to reduce corporate overheads and establish a more competitive cost structure.
It has taken other cost reduction measures including transitioning IT costs from fixed to variable, releasing excess floor space, increasing occupancy levels in offices, and transferring selected operations to lower cost execution centres. These changes are only just starting to trickle through to the balance sheet.
The half-year results, delivered in February this year, showed revenue was down only 8.4% from the previous corresponding period, with profit after tax down by 7%. In fact, profit after tax actually increased by 3.6% for the half-year, when taking into account previous revaluation of investments.
As capital expenditure in the oil and gas industry continues to shrink, WorleyParsons has switched focus to the more stable, operational expenditure side of the ledger. It has already begun to see some positive results in this space, with several smaller contract wins, and expects this will assist in maintaining revenue levels going forward.
The company's diverse earnings base means the loss of a major contract or two should not have a significant impact on overall revenue, and in turn, profits. The top 10 group contracts account for only 15% of overall revenue, with the majority of earnings coming from smaller contracts.
Due to the operational changes it has implemented, WorleyParsons expects to see annualised savings of between $75 million to $100 million from the 2016 financial year. It has more than $400 million cash on the balance sheet and strong cash flows. This is a great position from which strategic, bolt-on acquisitions of smaller industry players can be made.
The consensus 12-month price target of $10 represents upside of around 13%, whilst expected dividends of 64 cents give a dividend yield of 7.3%. Given the positive steps taken by WorleyParsons, I think the share price target is on the conservative side.
Foolish takeaway
WorleyParsons has been working hard to control costs, maintain revenue, and diversify earnings over the past 12 months. It has already foreshadowed a lower full-year profit, and I expect the annual result, due on August 26, will surprise the market. If the result exceeds expectations, it would be a good indicator that it has successfully adjusted to market conditions, and a share price recovery should follow.
