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Buying indigestion

Michael McCarthy
Friday, December 07, 2018

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Oil prices are off more than US$25 a barrel, or 33% plus since early October. Recent price action in West Texas Intermediate and Brent crude oil (the main US and European grades respectively) shows the first positive signs in months.  Both look more solid, and have bounced off key technical price levels. And of course the time for investors to take energy exposures is when oil prices are nearer lows than highs.

Stocks like Woodside, Oilsearch, Origin energy are on some investors’ radar. Santos is the major energy stock considered most leveraged to the oil price, and its recent acquisition of Quadrant energy improves its overall asset portfolio. However there is another way to gain exposure to a rising oil price.

The engineering groups that provide services to the oil and gas industry are also leveraged to the oil price. When oil prices are rising, producers look to bring more reserves on line, increasing the demand for services. The reverse is also true. Worley Parson (WOR) is one such group. A placement to fund the purchase of Jacobs Engineering has seen its share price fall more than 35%, compared to the 20-30% falls in major energy stocks.

The acquisition in my view enhances the longer term appeal of WOR. However the stock suffered digestion issues as the market absorbed the share placement. The late October transaction occurred against a backdrop of tumbling oil prices, a potential explanation for the fact that around half of all retail investors did not take up their entitlement under the offer. This overhang contributed to WOR’s drop back to the 2018 lows.

The shares that formed part of the acquisition were issued to Jacob’s shareholders at $16.92. Institutional and retail investors paid $15.56. The digestion issues around the share placement mean investors can buy WOR at prices close to $14 per share. In my opinion, this represents an opportunity to take leverage to any upside in oil prices in an energy industry service provider that has recently significantly increased its market share, and vastly improved its investment profile.

Published: Friday, December 07, 2018


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