Category: Financial Markets

Investment Thesis:

• Higher oil prices benefit ORG’s APLNG project (higher revenues).
• Balance sheet position is being restored with management focused on getting the debt covenants back to an investment grade level.
• Achieving milestones within the APLNG project.
• On-going focus on operating cost and capital expenditure reduction.
• Increasing dividend profile and with a restored balance sheet the Company can also consider other capital management initiatives. 
• Rationalization of asset portfolio, including asset sales and the IPO of its conventional upstream business should help improve the balance sheet position.  

Key Risks:

• Exploration and production risks.
• Lower energy prices, particularly oil prices (for its APLNG project). 
• Structural change in energy markets & increased competition.  
• Not meeting cost-out targets. 
• Highly geared balance sheet, with the company not being able to reduce debt fast enough. 

Key Highlights:

• Outlook. Management expects (refer to figure 2 for details): For FY23 underlying earnings to be higher YoY, driven by growth in earnings from the gas business, while electricity gross profit to remain suppressed, risk of coal under-delivery remaining including due to rail and mine performance, and Australia Pacific LNG (APLNG) production of 680-710 PJ, reflecting ongoing strong field performance and allowing for the impact of recent wet weather events. 
• For FY24 underlying earnings delivering further YoY growth with magnitude of growth dependent on fuel and energy prices and the extent to which these are reflected in customer tariffs, the outcome of a price review on ~50 PJ of gas supply, and delivery of targeted retail savings. 
• APLNG sale completed – proceeds used to strengthen balance sheet and provide shareholder returns. The Company benefited from a record cash distribution from the sale of a 10% interest in APLNG of $1,595m, due to higher realized oil and spot LNG prices, contributing to a strong FCF of $1,062, up +3.1% YoY with management using the proceeds to reduce adjusted net debt by -38.8% to $2,838m (leverage declined to 1.9x vs target range of 2-3x), investing in growth and shareholder returns, including a $250m share buyback and a 75% franked final dividend of 16.5cps, equating to full year dividend of 29cps, up +45% YoY and representing 47% of FCF, towards top end of management’s target range of 30-50%. Management also announced the Board is considering extending the initial $250m share buyback over the course of FY23, subject to operating conditions and growth opportunities.
• FY22 results summary. Underlying profit rose +30% YoY to $407m, as strong commodity prices drove higher earnings in Integrated Gas, partially offset by lower earnings in Energy Markets due to very challenging market conditions which led to a contracted coal supply. Statutory profit was a loss of $1,429m vs loss of $2,281m in pcp, impacted by a non-cash impairment associated with accounting for electricity and gas derivative assets. 
• Operating cash flow declined -45% YoY, driven by lower underlying EBITDA adjusted for non-cash items partially offset by an improved working capital position.
•  Liquidity remained strong at $3.3bn including $0.6bn of cash, enough to meet near-term debt and lease liability payment obligations of $0.3bn.
• Results by segment. Energy Markets underlying EBITDA declined -63% YoY impacted by high commodity prices and domestic supply interruptions, combined with volatile wholesale electricity prices, higher fuel costs and wet weather. Investment in Octopus continued to exceed expectations, with the company growing to become the UK’s fifth largest energy retailer, increasing its customer base by +25% YoY to 5.5 million customer accounts. The Company achieved $170m of a targeted $200-$250m in cash cost savings by FY24.
•  Integrated Gas underlying EBITDA increased +62% YoY, driven by high commodity prices, sustained low operating and capital costs, and stable production. 

Company Description:

Origin Energy (ORG) is an integrated energy company with operations in exploration, production, generation and the sale of energy to millions of households and businesses across Australia. The Company has extensive operations across Australia and New Zealand and is pursuing opportunities in the fast-growing energy markets of Asia and South America. The Company has two main segments: (1) Energy Markets – retail sales of electricity, gas and other customer solutions; electricity generation; and wholesale trading of electricity and gas. (2) Integrated Gas – consists of upstream exploration, development and production; the segment also holds the 37.5% ownership in Asia Pacific LNG project (APLNG).

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.