The energy transition will drive a significant increase in investment across the energy sector, particularly within renewables.
Industry estimates from the IEA and IRENA suggest a ~13% CAGR in transition investment is required over the next decade, as more countries and companies align with net-zero emission targets.
Momentum in the energy transition has accelerated in recent years. Global energy investment is set to exceed US$3 trillion for the first time in 2024, with US$2 trillion of this being directed towards clean energy technologies.
However, annual clean energy investment still needs to rise above US$5 trillion per annum to achieve ‘net zero’ by 2050 according to the IEA, representing ~US$150 trillion of cumulative capex.
In line with this backdrop, over the next decade we anticipate a significant ramp up of capital investments into sustainable energy projects.
Conventional Energy Capex Also Needs to Rise
While the outlook for capex on renewable energy projects is particularly strong, further investment into conventional energy is still required to fulfil the world’s growing energy needs (driven by economic development in Asia).
Upstream oil and gas investment is set to reach a decade high of $603 billion in 2024. However, capex will need to increase further over the medium term to account for:
- Significant underinvestment into energy over the last decade.
- The loss of Russian pipeline gas from the global market.
- The heightened focus from governments on energy security, affordability, and reliability.
- Greater push for the ‘decarbonisation’ of oil and gas operations.
- The transition away from higher carbon energy sources (namely coal).
Worley is a Significant Energy Transition Beneficiary
Worley (WOR) is held in the Focus Portfolio at a 3% weight
Worley is a leading global player within the engineering services sector. The company’s backlog (i.e. contracted work) and therefore earnings are tied to the capital investments made by its customers in the energy, chemicals, and resources sectors. As such, Worley is a direct beneficiary of increasing levels of capex across the energy sector.
Worley is leveraged to near-term (conventional) and long-term (sustainable) energy capex tailwinds
While conventional energy projects still account for roughly half of Worley’s revenues, the company is transitioning towards sustainability-related projects where the company is already a global leader.
Worley is well placed to benefit from the current oil and gas reinvestment cycle over the near to medium-term, while its progressive pivot towards sustainability-related work sets it up to benefit from the sustainable energy capex ‘supercycle’ over the long-term.
| Client | Sector | Case study - project summary |
| Traditional Projects Core conventional service offerings focussed on oil, petrochemicals, and minerals such as iron ore and alumina. |
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| ExxonMobil | Oil | Provided engineering and design services for the Hebron project to allow the offshore oil field to withstand extreme conditions 350km off the coast of Canada. |
| Shell | Oil | Providing the engineering and design services for the Sparta project, a floating production development approximately 270 kilometres off the Louisiana coast. |
| Sustainability Projects Contributes to sustainable development through servicing sustainable market segments (e.g. renewables, green hydrogen, plastics recovery) |
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| Madar | Renewable Energy | Provided project management consulting, design review and technical support during the construction of Uzbekistan’s first utility-scale solar photovoltaic power plant. |
| Raygen | Renewable Energy | Supported RayGen with their plans to build a utility-scale, grid-connected solar plant with a world-leading GWh-scale storage capacity in South Australia. |
| Naturgy | Renewable Energy | Developed studies on floating systems and naval architecture, as part of the development of offshore floating wind farms. |
| Transitional Projects Supports the energy transition by servicing 'transitional' market segments (i.e. natural gas), or through service offerings that improve the sustainability outcomes of traditional market segments such as carbon capture, and energy efficiency. |
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| BP / SOCAR | Gas | Provided design documents for the procurement, construction and commissioning of the Trans Anatolian Natural Gas Pipeline project. |
| VPI | Gas | Retrofitted a gas-fired plant with carbon capture and storage to reduce CO2 intensity. |
| Chevron | Oil | Helped Chevron convert its existing hydrofluoric acid alkylation unit into the first ever ISOALKY alkylation unit, in order to produce high-octane, cleaner-burning fuels. |
| BP | Oil | Supported BP on the Kwinana Refinery conversion to produce sustainable aviation fuel (SAF) and renewable diesel (HVO). |
| 1PointFive / Occidental | Carbon Capture | Performing EPC (engineering, procurement and construction) work on Occidental’s and 1PointFive’s first direct air capture plant currently under construction in Texas. |
Source: Worley, Wilsons Advisory.
Supportive Industry Dynamics Are Benefiting Top Line Growth and Margins
Significant growth in capital investments into both conventional and sustainable energy projects has resulted in a growing volume of work for contractors like Worley.
This has resulted in improving competitive dynamics industry-wide, which is driving:
- Strong top line growth – Worley’s factored sales pipeline and backlog is benefiting from a growing number of tendering opportunities, driving strong revenue growth.
- Margin expansion – given the large volume of project work across the market, Worley is able to be more selective when deciding which projects to take on, allowing it to avoid low-margin and high-risk undertakings. This has driven pricing higher across the board and allowed Worley to write more lower-risk ‘cost reimbursable’ contracts.
Given industry dynamics remain strong and energy-sector capex is still rising, we expect solid top line growth and EBITA margin expansion to continue for Worley over the coming years, which underpins a consensus EPS CAGR of 14% between FY23 and FY30.
Confident in the Medium-Term Outlook
Leaving side Worley’s attractive long-term outlook (supported by energy transition tailwinds and supportive industry dynamics), we are also confident in the company’s medium-term earnings outlook, which is supported by two key factors.
1. Industry channel checks show continued growth in capex from Worley’s customers
Our analysis of major listed companies in Worley’s key client segments implies that the capital investments made by its customers is growing, in line with our view that oil and gas capex is likely to rise. Industry forecasts for oil and gas capex have been upgraded in recent years to reflect a stronger demand outlook, elevated oil prices (incentivising investment), and additional spending on ‘transitional’ decarbonisation projects. Therefore, we are confident that the medium-term outlook for both traditional and transitional project earnings is robust.
2. CP2 LNG project – underappreciated earnings potential
Worley has been awarded an EPC (engineering, procurement, and construction) contract for phase 1 of Venture Global’s CP2 LNG project, which has received regulatory (FERC) approval and is expected to deliver its first shipment in 2026.
CP2 LNG is likely to be Worley’s largest ever project, which will underpin significant earnings growth over the medium-term. Our analysis indicates the project could generate EBITA of ~A$600m.
Given the earnings potential of CP2 LNG, there are upside risks to consensus EBITA over the medium-term. We note the magnitude of analyst upgrades since the project was announced (10 May 2023) have been less than CP2 LNG’s expected EBITA contribution alone (while momentum has also been positive elsewhere in the business with 15 other major contract announcements in this period).
Therefore, the scale of CP2 LNG provides us with a high degree of confidence in Worley’s ability to meet/beat consensus estimates over the medium-term.
Assessing the value of CP2 LNG
Venture Global’s Plaquemines LNG terminal provides a relevant case study to estimate the potential earnings contribution of CP2 LNG, given: 1) it is the same customer, 2) it is a comparable asset (both are ~20mtpa LNG terminals located in southern Louisiana / on the Gulf Coast, and 3) CP2 LNG will have a similar design, and use identical equipment to Plaquemines LNG.
According to public disclosures from KBR, Plaquemines LNG has a total contract revenue value of US$5.1bn (100% basis, excluding procurement), or A$7.5bn at the spot exchange rate. Combining this revenue value with Worley’s FY25e consensus EBITA margin of ~8% implies the project could generate EBITA of ~A$600m, likely between FY26-28.
Pullback Creates an Attractive Buying Opportunity
The underperformance of Worley since late April has been triggered by Sidara’s block trade of ~19% of its stake in the company. Another factor that has weighed on the share price has been (misguided) market concerns around Worley’s dispute with an Ecuadorean state-owned enterprise, which has resulted in negligible impacts to its earnings or gearing.
Since then, Worley’s valuation has de-rated materially – despite its fundamentals and medium/long-term earnings growth outlook remaining strong (with no material changes to consensus estimates in recent months).
Worley now trades on a forward PE multiple of ~16x, which is highly attractive considering consensus expectations of an EPS CAGR of ~21% between FY25/26 (with risks skewed to the upside). This is also a significant discount to the average multiple Worley traded on in the early stages of the last energy investment cycle.
The next major catalyst will be Worley’s full year earnings report on 27 August 2024, which in our view will allow the market to refocus on the company's strong fundamentals.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
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