Is Worleyparsons Limited a bargain at this share price? 

Years of global underinvestment in hydrocarbons may one day create value for Worleyparsons Limited (ASX:WOR) shareholders. 

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Worleyparsons Limited (ASX: WOR) is one of Australia’s premier engineering, project management and advisory services companies.  The company’s global focus includes hydrocarbons, mineral, metals, chemicals and infrastructure sectors. 

The market responded positively to recent news that Saudi Aramco awarded WorleyParsons the project management and front-end engineering and design (FEED) services contract for the offshore oil and gas facilities portion and the onshore upstream and downstream pipelines portion of the offshore Marjan Oilfield Development program. This news was not tagged as price sensitive. 

Deutsche Bank analysts have hinted that WorleyParsons revenue may increase, company debt may fall (due to improved management of working capital) and that a dividend may even be reinstated. Broker ratings aside, WorleyParsons has a long way to travel before it can climb back to where it was several years ago.  

WorleyParsons has a diversified business strategy, however, the oil and gas industry remains the rump of the company’s operations. Recovery in the volume and profitability of contracts within this sector remains critical to the company’s prospects. 

WorleyParsons is winning contracts in all sectors, however, it is difficult to gauge the actual profitability of these activities in the midst of significant staff cutbacks and radical cost-cutting measures while the company is correctly re-scaled to nearer-term revenue expectations.  

The company’s May 2017 Investor Presentation flags a range of opportunities including China’s New Silk Road economic belt initiative and in Saudi Arabia.   

Investors should be aware that the New Silk Road initiative is in its formative stages only.  China’s long term generational visions may present opportunity but there are no guarantees.

Winning favour and ongoing work from companies such as Saudi Aramco (assuming solid ongoing contractual performance) is a more tangible goal. 

Organisational restructures of the scale experienced in recent years at WorleyParsons are never a pure or popular process. Within the scope of the change process, the ability of executive management to now build and retain the staff morale and expertise that is necessary to win and renew contracts will be the key determinant of shareholder well-being. 

The political, economic and conflict related reasons that caused the global crude oil glut are unlikely to go away any time soon. Astute observers will however be aware that several years of underinvestment in the sector will eventually lead to an undersupply crisis.

When the game of catch-up within this sector gains traction, companies such as WorleyParsons will be well placed to realise significant profit margins on the fees they charge. 

Foolish takeaway 

WorleyParsons says that its backlog program of upcoming work is increasing and that staff numbers are stabilising.  The market is starting to price WorleyParsons accordingly. 

WorleyParsons’ global revenue footprint may, when stabilised, interest investors seeking less portfolio exposure to Australia’s domestic economic conditions and markets.   

Although operating conditions for WorleyParsons may remain reasonably challenging over the next few years the potential for the company to create shareholder value in the longer term remains real in my opinion.   

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Motley Fool contributor Paul Ranby has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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