Is Worley an emerging global sustainability player?


Worley (ASX: WOR) is a global engineering, advisory and project management services company with a worldwide team of consultants, engineers and data scientists focused on the energy, resources, chemicals and infrastructure sectors.

Its roots date back to the 1970s when a small Australian engineering consultancy acquired the Australian interests of Worley, an American-based engineering firm, with a strong reputation in the offshore gas and oil sector.

Over the years it has grown its capability and footprint through a series of acquisitions, including in 2018, when it acquired Jacobs Engineering Group's energy, chemicals and resources division.

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What does Worley do?

It is now a leading player in the engineering and project management services across the project lifecycle, from planning, development, operations, maintenance and project decommissioning. Worley's customers include most of the world's largest oil and gas, mining, chemical and petrochemical companies.

Worley has an asset base of around 56,000 project engineering staff that help its clients solve complex technical problems. It has deep expertise and long-standing relationships working with customers in the traditional hydrocarbons energy sector.

There is increasing opportunity for Worley to leverage its skills, client relationships and project experience in helping solve the challenges in transitioning to more sustainable lower-carbon technologies. This includes planning and supporting the development of industrial hubs, decarbonising existing assets, green hydrogen, carbon capture and storage, offshore wind, power networks, sustainability advisory and environmental consulting.

To capitalise on this opportunity, Worley has made an early strategic shift to invest $100 million in scaling up and building out its sustainability consultancy capability and capacity, with the aim of 75% (currently 32%) of its sales being from sustainability projects by 2026.

Strategy and outlook

After more than a decade of declining capital expenditure in the energy sector, and with international oil companies more focused on returning capital to shareholders than investing in new projects, we see a brighter future for Worley.

The Russia-Ukraine conflict has resulted in more strategic rethinking around energy security and supply, and increase in demand for LNG and upstream hydrocarbon processing facilities like the Brunsbuttal floating LNG import terminal in Germany, which is supporting growth in Worley's conventional energy business.

Strong demand for sustainable aviation fuels and renewable diesel is also seeing chemical processors invest in refinery conversions like BHP's Kwinana plant, which Worley's chemicals business is working on.

Further, the demand for lower carbon solutions through supporting the development of battery supply chain facilities, grid upgrades, low carbon hydrogen projects and carbon capture and storage facilities is driving growth in work in Worley's resources business.

Importantly, there is also growing evidence government policies and regulations are starting to create the right environment for Worley's customers to invest.

The US Inflation Reduction Act (IRA) has been instrumental in seeing a shift in attitude and behaviour by many of Worley's customers to commit to lower carbon technology projects.Further, the European New Green Deal, UK Energy Security Plan and Canadian renewable tax credit initiative show further commitment that governments are becoming more serious in funding the energy transition.

If the latest estimate by the Global Energy Transitions Commission in its Financing the Transition report - that around $3.5 trillion a year of capital will be needed on average between now and 2050 to build a net-zero global economy - proves correct, we see strong tailwinds and opportunity for Worley given its global scale and competitive advantages.

The growth in sustainable work for Worley is coming off a low base and it is still early days. But at a recent investor day, it highlighted there is growing momentum in the key operating indicators around growth in headcount, backlog and sales pipeline.

Sustainability work is also outpacing work in traditional markets, and now represents 40% of the backlog, and supports the target of having 75% of its sales coming from sustainability work by 2026.

The combination of better market growth and the ability to take share and fixed cost leverage should drive 10-year earnings per share compound annual growth of around 10%.

In a lower growth environment, and where increased spending on transitioning to lower emissions energy technologies seems an undeniable trend in an uncertain world, we believe Worley looks an attractive proposition, with plenty more upside.

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Hamish Tadgell joined SGH in July 2015. He is Portfolio Manager of the SGH High Conviction Fund. Prior to this he worked at Goldman Sachs, where he was Chief Investment Officer - Australia for Global Investment Research. Hamish's distinguished career in investment markets and equity research spans 24 years, during which he has held positions in both Australia and the UK at JB Were and Goldman Sachs. Previously, Hamish spent seven years in professional services at Arthur Andersen. He holds a Bachelor of Economics from Monash University.