WorleyParsons (ASX:WOR) provides professional engineering and management services to the energy, resource and complex process industries.
WOR offers a broad range of services, from feasibility studies to design and project services, and is exposed to a number of sectors.
The group is a leader in its industry and has established long-term relationships with a number of companies, including some blue chip stocks.
Despite facing obstacles in FY11, WOR was able to grow its profit and revenue, with the Hydrocarbons business driving the result.
Moreover, WOR is ideally placed for the future, as the lure of higher energy prices is likely to drive demand for its services from the bigger oil companies.
FY11 results highlight underlying strength
On 24 August, WOR reported a 25% lift in FY11 net profit to $364.2 million. On an underlying basis, profit was up 2.5% to $298.5 million, matching previous guidance.
A final dividend of 50 cents was declared, bringing the full year dividend to 86 cents per share.
It was a solid result considering WOR faced a number of headwinds such as the strengthening AUD, Middle East instability and natural disasters.
The result didn’t really reflect the strength of the underlying business. Revenue grew 19% on-year to $5.9 billion, driving by a strong performance in the Hydrocarbons business.
The group was also in financially strong shape, with a gearing ratio of just 22% and operating cash flow growth of 5.1% in FY11. Moreover it had more than 50% in untapped debt facilities.
Taken together, this tells us WOR has significant firepower to expand its business –organically and/or through M&A activity.
The group forecast good underlying profit growth in FY12, continuing the momentum displayed in the 2H11. The guidance was reaffirmed at WOR’s AGM last week.
Hyper about Hydrocarbons
The majority of WOR’s earnings are in the Hydrocarbons division. Hydrocarbons are organic compounds, found mostly in crude oil.
WOR’s leverage to the energy market is a key attraction, particularly as demand for oil and gas is expected to strength in coming years due to emerging market growth.
The recent market turbulence has raised questions about faltering energy demand in the developed economies, which has been a factor behind WorleyParson’s recent share price weakness.
However we believe these fears are overblown given the oil supply/demand imbalance (dwindling oil supplies vs. growing energy demand) is only expected to worsen in coming years.
The lure of energy price appreciation at a time of growing demand is likely to see the big energy companies continue their ramp up of capex spending, putting WOR in an ideal position to accelerate its contract win rate.
LNG is the future
The big oil companies have also recognized that the world is moving towards more unconventional sources of energy such as LNG.
There are number of massive projects being undertaken throughout Australia, and WOR has had a hand in some of the key ones such as Pluto and more recently, Wheatstone.
WOR won a $235 million contract from Chevron for the construction of management services at the Wheatstone Project.
WOR’s experience in developing LNG projects, coupled with the established relationships it has with its blue-chip clients, makes it ideally placed to benefit from this increased focus on alternative energy.
Outlook
As the global growth engine continues to shift from developed economies to the developing regions, there will be increased demand for commodities.
As mining companies look to meet this demand, there is going to be a significant increase in capex activities over the coming years.
This will strengthen the market for WOR’s services, providing it with plenty of growth opportunities, especially in the hydrocarbons space.
WOR is in sound financial position and is expected to continue the positive earnings momentum into FY12.
The long-term relationships WOR has fostered with its blue-chip clients is likely to yield considerable benefits for the company, particularly as miners look to capitalize on rising commodity prices as well as the world’s shift to alternative energy sources.
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