Financial Markets - Investor Desk

Business Strategy & Outlook

Origin Energy offers exposure to relatively defensive Australian energy retailing and highly volatile liquefied natural gas exports. As a producer of commodities, Origin is a price-taker and has few competitive advantages. Capital and efficient scale are potential barriers to competition, but they’re not strong enough to justify an economic moat. Origin’s domestic energy retailing business grew quickly during the past decade, but strong acquisition-driven growth is unlikely to recur, with earnings growth largely dependent on Australia Pacific LNG. Acquisitions of government-owned energy assets were previously a key growth driver, but all state-owned retailers are now privatized. Origin, Energy Australia, and AGL Energy collectively control 80% of the market, and the Australian market regulator is unlikely to allow further consolidation among the majors. Future growth depends on energy demand growth, which is likely to remain modest. The price-based competition is to remain intense despite recent partial reregulation of electricity prices. A lack of competitive advantages means that a little more than tit-for-tat swapping of customers among the majors, which will allow them to largely maintain their market shares. The small new market entrants struggle to achieve scale.

In contrast to the retail market, the electricity generation market offers some growth opportunities. Substantial new renewable energy projects still need to be built to meet government targets and offset closing of aging thermal power stations, with Origin planning to significantly expand its installed renewable capacity. Domestic energy retailing is Origin’s core business and the cash cow that funds growth projects. Its relatively low-risk attributes are in stark contrast to APLNG. Concerns relate to exposure to volatile oil prices (given the link to LNG contract pricing) and high debt levels at Origin and APLNG. The long-term outlook assumes that significant Asian energy demand growth more than offsets increased supply and supports higher prices, though the global LNG market will remain oversupplied for a few more years after large recent supply additions.

Financial Strengths

Origin is in sound financial health following the APLNG sell-down, which netted AUD 2 billion in proceeds. Net debt/EBITDA (including cash distributions from APLNG) was 1.9 times in June 2022, at the bottom of management’s target range of 2.0-3.0 times. Earnings from the energy retailing business are falling because of weak wholesale electricity prices but should recover from fiscal 2023. The net debt/EBITDA stable at a little over 2 times for the medium term, supported by strong oil and LNG prices and a conservative dividend policy.

Bulls Say

The Australia Pacific LNG project is the largest coal seam gas to LNG project in Australia and could significantly increase earnings if oil prices strengthen.
Origin’s energy retail business is the market leader and should benefit from cost-saving initiatives.
Origin’s cash flow base is diversified, and the company is less susceptible to the vagaries of the market than a non-integrated energy provider.

Company Description

Origin Energy is a major vertically integrated Australian energy utility. Its energy retailing business is the largest in Australia, with about 4 million customers and a 33% market share. Its portfolio of base-load, intermediate, and peaking electricity plants is one of the largest in the national electricity market, with a capacity of 6,000 megawatts. Origin also operates and owns 27.5% of Australia Pacific LNG, which owns large coal seam gas fields and LNG export facilities in Queensland.

(Source: Morningstar)

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