Worley share price jumps on contract win and is my key pick in the sector

The Worley Ltd (ASX: WOR) share price is defying the market sell-off after it won a new major LNG contract and as oil prices firmed.

Shares in the engineering services group jumped 0.7% to $8.70 in morning trade while the S&P/ASX 200 Index (Index:^AXJO) fell 0.5%.

Energy stocks are also doing well with the Brent crude benchmark inching up 0.3% to US$45.24 in overnight trade.

The Beach Energy Ltd (ASX: BPT) share price jumped 1.8% to $1.46, Santos Ltd (ASX: STO) share price added 0.8% to $5.78 and Woodside Petroleum Limited (ASX: WPL) share price gained 0.5% to $20.48.

Market underestimating Worley

Despite the contract win, the Worley share price continues to lag its peers through the COVID-19 market meltdown. And this spells opportunity in my book.

Management announced that it secured a master construction services agreement (MCSA) with Corpus Christi Liquefaction LLC, a subsidiary of Cheniere Energy, Inc.

Under this agreement, Worley will provide civil, structural, mechanical, instrument and electrical, HVAC and marine construction services to Corpus Christi LNG liquefaction facility. The facility has a nameplate export capacity of up to 13.5 million tonnes per annum of LNG.

Diversifying income base

The deal reflects Worley’s strategic plan to pursue more LNG Maintenance, Modification and Operations business, as outline in its Investor Day presentation in June.

This is to diversify the group’s customer base to make it less reliant on petroleum projects, which are at the mercy of volatile oil prices.

However, the worse of the oil shock sell-off is over and commodity forecasters believe the outlook is looking brighter for the sector.

Outlook for the energy sector is improving

Given the underperformance of ASX energy stocks to the broader market, some experts are urging investors to go overweight on these stocks.

In my view, Worley remains the favoured way of gaining leverage to this thematic. Its business should be less impacted by the spikes and crashes of the crude oil price – even though you wouldn’t know that given the way the stock is trading.

Is the Worley share price a buy?

This could in part reflect concerns that engineering projects hold unquantifiable risks. You only need to look at the legal stoush between contracting group Monadelphous Group Limited (ASX: MND) and Rio Tinto Limited (ASX: RIO).

Nonetheless, I believe too much bad news is priced into the Worley share price, and a recovery in the oil price, along with further contract wins, will help the stock re-rate in FY21.

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Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. and WorleyParsons Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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