WOR (ASX) Ann: Annual Report to shareholders

I bought some recently at $11ish and would like to accumulate some more.

I assume what is going on here is that there is a global sell down of oil and gas related stocks due to (1) changes in the mandates of institutional funds due to ESG pressures to shift their portfolios towards greener companies; and (2) the long term structural shift away from fossil fuels which means that although medium term existing and currently approved projects are progressing, there will be an inevitable structural decline in new projects in the oil and gas industry over the next 5-10 years, therefore Worley (as a leader in oil & gas project mining services and development) seems like a natural loser long term.

my own take on this is:
1) on fundamental analysis of the numbers, Worley is currently undervalued and a buy
2) the rebound in oil prices and long term need for oil, coking coal and gas for many industries and use cases globally means we will see a lot of ongoing projects being developed and approved in this space in the next 1-2 years despite the govt and private sector wanting to transition towards net zero by 2030-2050
3) transitioning oil and gas projects to lower carbon output projects and decommissioning old projects requires billions of intensive investment which Worley is leading in
4) a trend towards new transition fuels such as blue hydrogen (as a transition towards green hydrogen) and gas plays into the Worley skill set and they are already winning projects in this areain this
5) truly green projects such as lithium, graphite, nickel, copper, hydrogen, solar, hydro, wind, potash, etc etc will all require huge investments which will be built by companies such as Worley, and Worley are already winning contracts in these project areas.

so to me, Worley seems like a buy with a medium term 3 year lens. I’m mindful not to buy too much too early against the trend line which is still down, and I’m mindful that there are risks so a margin of safety in the valuation is required.

having said that, I think the current sp of $10 with a yield of 5% gives a good margin of safety, and presents a lot more upside than downside on the balance of probabilities.

even if the share price is stagnant over the next 12 months, you get 5% yield (compared to near zero for cash and 1% for bonds) while you wait for your investment thesis to play out and for the 15b in pipeline plus the new projects they will undoubtedly win to translate to revenue growth and margin expansion due to favourable economics of those new projects, whilst recent cost cuts will further bolster margins.

of course inflation cost pressures could be a big problem given Worley operates on fairly thin net margins, thus small inflationary cost impacts could erode margins and even turn profit to loss on the bottom line. That’s the other risk here.

hence I would be cautious here, but if the sp drops further below $10 it would be a good medium term risk reward investment as a smallish position eg 5% as part of a diversified portfolio across other industries.