Worleyparsons Limited (ASX: WOR) has seen its share price tumble more than two-thirds over the past year, as the services company has been hit by a downturn in the energy sector.
It’s hard to believe the share price was once above $50 in late 2007 before it all came crashing down. Shares are now trading at just $3.45. The company specialises in providing engineering, procurement, construction, maintenance as well as consulting and advisory services primarily to the resources and energy markets.
The global financial crisis put a crimp on the company’s business, and Worleyparsons has seen earnings per share sink every year since 2009, despite producing billions more in revenues and virtually no increase in the number of shares on issue.
The falling oil price along with sustained low commodity prices such as coal has meant many of the company’s clients and prospective clients have dramatically slashed capital and operating expenditure.
While it’s clear from the increasing revenues in the chart above that Worleyparsons is winning contracts, margins have been crushed, and the company is struggling to find large projects above $100 million. A large percentage of its projects are less than $20 million in size (5,293 out of a total of 7,227) last financial year – and all of its competitors face similar issues – Monadelphous Group Ltd (ASX: MND), Broadspectrum Ltd (ASX: BRS) ex-Transfield Services and UGL Limited (ASX: UGL) to different extents.
The cap it all off, Worleyparsons faces a shareholder class action over disclosure practices with regard to profit downgrades.
Some analysts appear to highly optimistic about the company’s future, with Credit Suisse rating it one of their Top 6 shares expected to deliver more than 120% returns in 2016. Surprisingly the broker doesn’t have a buy rating on shares in Worleyparsons – which seems bizarre. Surely a return of more than 120% in a year would rate a Buy?
As much as the company is striving to turn around its performance, low oil and commodity prices for an extended period will continue to put pressure on Worleyparsons management to cut even more costs out of the business. More than 10,000 staff have left the company since 2012, and more cuts are likely.
Unlike Credit Suisse, I don’t see a recovery ahead in 2016 for Worleyparsons. Mining capital expenditure is not expected to hit bottom until 2017, commodity prices appear unlikely to soar anytime soon, and competition in the company’s operating sectors will remain fierce.
The share price may look cheap on a trailing P/E ratio of around 4x and a dividend yield of above 6%, but shares can always get cheaper from here and dividends have already been slashed in the past two years. Returns on equity have also plunged from above 20% to high single digits and net debt of $785 million is nearly equal to its market cap.
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