Worley Limited (ASX:WOR): A Contrarian Play on Deleveraging and Strategic Turnaround

The stock market often rewards patience, and nowhere is that clearer than in the case of Worley Limited (ASX:WOR). Despite trailing peers in return on equity (ROE), the engineering giant is quietly positioning itself for a comeback. With deleveraging underway, strategic asset sales unlocking value, and high-margin sustainability projects fueling growth, now could be the moment to buy this undervalued stock before the broader market catches on.

Deleveraging Progress: A Stronger Balance Sheet Ahead

Worley's net debt has been a point of concern, but the trajectory is moving in the right direction. As of December 2024, net debt stood at AU$1.25 billion, down from AU$1.88 billion five years ago, with a debt-to-equity ratio of 31%—well within safe thresholds. Crucially, the company's interest coverage ratio of 6.8x (calculated from EBIT of AU$642 million) leaves ample room to service debt comfortably.

The AU$500 million equity buyback announced in February 2025 underscores management's confidence in the balance sheet. Meanwhile, the planned sale of its UK-based Worley Field Services (WFS) division to Poluma Group by mid-June 2025 will further reduce near-term liabilities while redirecting capital toward higher-potential projects.

Strategic Moves: Divesting for Focus, Partnering for Growth

Worley is sharpening its focus on high-margin opportunities in energy transition and LNG infrastructure. The Alaska LNG Pipeline project—a partnership with Glenfarne Alaska LNG, LLC—is a prime example. This 807-mile pipeline project, targeting a Final Investment Decision (FID) in 2025, positions Worley as a critical player in North America's energy future. The company's role in both the pipeline and the配套Cook Inlet Gateway LNG terminal highlights its ability to secure multi-year, fixed-fee contracts with minimal execution risk.

Additionally, Worley's Q1 2025 saw 1,048 sustainability-related project awards, a 15% jump from the same period in 2024. These projects, ranging from renewable energy integration to carbon capture engineering, align with global decarbonization trends and promise higher margins than traditional oil and gas work.

ROE: A Lagging Indicator, Not a Fatal Flaw

Critics cite Worley's ROE of 6.8% as a weakness—far below the Construction sector average of 9.4%. However, this metric is misleading in the short term. The company's project pipeline and balance sheet improvements suggest a turnaround is imminent. Projections show ROE rising to 9.6% by 2027, fueled by:
1. Deleveraging: Lower interest expenses will free cash flow for reinvestment.
2. High-margin projects: Sustainability and LNG contracts typically carry margins 3-5% higher than legacy energy work.
3. Operational efficiency: Cost-cutting and portfolio streamlining (e.g., the WFS sale) will reduce overhead.

Why Now? The Contrarian Edge

The market has yet to price in these catalysts. Worley's shares have underperformed the ASX200 by 18% over the past year, driven by fears over energy sector volatility and lingering debt concerns. Yet three factors make this a compelling contrarian opportunity:
- Undervalued valuation: At 8.2x forward EV/EBITDA, Worley trades at a 30% discount to its five-year average.
- Catalyst-rich timeline: The WFS sale, Alaska LNG FID, and August 2025 earnings report could all spark upward re-rating.

Historical data supports this timing: buying on quarterly earnings announcement days from 2020 to 2025, holding for 20 trading days, averaged a 152% return. While this strategy carried a maximum drawdown of 30%, its Sharpe ratio of 0.86 suggests a favorable risk-reward profile for investors with a medium-term horizon.

• Analyst optimism: Of 32 analysts covering WOR, 18 rate it “Buy” or “Strong Buy,” with a consensus price target of AU$14.50—a 22% premium to current levels.

Risks to Consider

• Project delays: The Alaska LNG Pipeline's FID hinges on securing partners and regulatory approvals.
• Geopolitical headwinds: Energy demand fluctuations could impact LNG project timelines.
• ROE stagnation: If margins fail to improve as expected, the stock could underperform.

Conclusion: A Turnaround in the Making

Worley Limited is the definition of a contrarian play: a temporarily out-of-favor stock with improving fundamentals, strategic clarity, and a balance sheet strengthening faster than the market realizes. While ROE lags today, the path to 9.6% by 2027 is clear. For investors willing to look past short-term metrics and bet on Worley's engineering prowess and project pipeline, now could be the optimal entry point before these trends crystallize.

The question isn't whether to buy WOR—it's whether you can afford to wait.