WOR is one of the world's largest consulting engineering firms with offices around the globe and HQ in Sydney. SP peaked at $50 9 yrs ago and bottomed at $3 just 11 months ago. Since then have more than tripled reaching $10.35 late last week. I've been short for over 6 months and will explain why.
WOR rode the mining/hydrocarbon boom better then almost any other. Contracts were 'cost plus' and the revenue was phenomenal and margins excellent despite salaries doubling. Contracts above 5 Billion were not unusual and Gorgon has cost about A$70 Billion. But consulting engineers design, manage and commission projects. WOR does no construction and the only machines it owns are computers. Hence, unless specified its hard to know what % of a 5 Billion dollar contract accrues to WOR. It can be 5, 10 or possibly 15%.
But boom is long gone and capex around the world is a fraction of that just 2 yrs ago. The massive LNG projects in Oz are largely complete, IO mines in Pilbara have reached optimum output, and most importantly oil and gas price is half that of 30 months ago.
WOR's specialty is large hydrocarbon and chemical projects, the bigger the better. Examples are development of offshore oil platforms, fertilser and crop chemical plants. There are complex designs and very expensive.
Currently world has enough oil, gas, fertiliser and chemicals and very few new large projects are around the corner. An exception is Kazakhstan where WOR is well established and new oil field is being commissioned by them.
Page back and you'll see WOR used to announce new contracts almost weekly. Over past 4 yrs the numbers have dropped considerably and only 3 'contracts of significance' have bee awarded during the past 6 months i.e. 1Hfy17.
The past 4 reports from WOR emphasise 3 things:
1) The macro has changed dramatically and new projects are being cancelled, postponed, delayed etc. The results can be seen in the rapid fall in WOR's revenue stream each half year.
2) Sector is very competitive and customers are unwilling to sign cost plus contracts. Margins are tight.
3) WOR's main response has been to cut costs dramatically. Workforce of 44,000 has halved. Office space has been massively reduced along with cuts to overheads across te board.
Savings of 200m have been made and firm are targeting and incredible 350m in total. It demonstrates how extravagant the firm became during the boom. The aim is the increase margins on any work received and i expect the 1Hfy17 result to show this.
But WOR's revenue stream continues to fall. They need to keep tendering and there are limits to further cost cutting. New contracts have much tighter conditions with little margin for error. Mistakes are worn by contractors and not customer.
So main question is: Will the macro improve and more CAPEX eventuate in the sectors WOR has specialist knowledge/skill? I don't see much change and explain below.
Despite oil price rising over 15% during past 6 weeks (was 20% but down another 2% last night) many offshore oil developments are uneconomic. They need oil at $80 minimum and often $100. As this article states.... A full ONE TRILLION dollars of capex has been lost and unlikely to reappear anytime soon.
Analyst is bullish re oil price: "There are several reasons oil prices are going to continue to rise. The recent OPEC supply cut and the rise of geopolitical risk are two important factors. However, the most important reason is the decline rate for deep-water oil. There is an annual production decline of about 3 million barrels a day from existing deep-water oil megaprojects. That's far more than the current supply-and-demand imbalance."
Nevertheless he also emphasises:
"Because investors are wary of new long-term megaprojects, cuts of over $1 trillion in capital spending for such projects in 2016-2020 is unlikely to be replaced. There is also the implicit threat of OPEC pumping more oil that is likely to keep such projects from coming online indefinitely. That means the decline in deep-water oil production is terminal."
DSD: Hence, he says the days of large offshore developments are gone as shale oil along with big jump in EVs will make this huge investments uneconomic. Large scale oilfield investment/development has been a KEY source of revenue for WOR over past 15 years. http://www.marketwatch.com/story/4-stocks-for-oils-final-bull-market-2016-12-28
So that leaves fertiliser, crop chemicals, other chemical plants and reneal energy as potential large projects in which WOR has expertise. I see renewable energy as firms best bet but again the sector (including firms from China) is very competitive. Contracts will be hard fought for.
No doubt WOR can win numerous small contracts on LNG plants, IO mines etc but the big projects scene is bleak.
So what can we expect late Feb? Look at the outlook statements from WOR in the past several reports and its striking that no figures are mentioned. No even a range. Instead WOR talk about the 'challenging and difficult' environment facing their customers and caution shareholders there is 'no sign' of a turnaround.
Hence, i expect 1Hfy17 revenue to be less than pcp. Yet SP has more than tripled! Sure beats me. On a previous thread estimate from an analyst had WOR EPS fy17 at 128 cents!!
As i posted several months ago i estimate fy eps in low fifties with a poor 1H result in 6 weeks time of around 20-23cents and zero dividend.
Hence, i remain short as Occam's razor in WOR.
WOR Price at posting:
$10.11 Sentiment: Sell Disclosure: Not Held
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