Origin Energy Limited

Company Overview: Origin Energy Limited (ASX: ORG) is a leading energy company involved in the exploration and production of natural gas, wholesale and retail sale of electricity and gas, electricity generation and sale of liquefied natural gas (LNG).  The company mainly operates two businesses - Energy Markets and Integrated Gas. Origin has a 37.5% interest in Australia Pacific LNG (APLNG), which is a significant supplier to both domestic and international LNG markets.

ORG Details

Financial Growth Supported by Low-Cost Operations: Origin Energy Limited (ASX: ORG) is a leading energy company that sells electricity, natural gas, LPG, and green power products to Australian homes, businesses and industrial customers. The company owns 37.5% interest in Australia Pacific LNG (APLNG), which is a 9Mtpa integrated LNG project, backed by JV partners ConocoPhillips and Sinopec. The company’s strategy is focused on maximising value of its existing businesses and pursuing growth in customer value and low carbon solutions. In order to accelerate towards green energy, ORG is progressing opportunities in green Hydrogen and Ammonia and is focused on reducing emissions from existing operations. Over the past five years (2016 to 2020), the company’s bottom line has improved significantly, rising from a net loss of $628 million in FY16 to a profit of $83 million in FY20.

Five-Year Financial Summary (Source: Company Reports)

During the December 2020 quarter, APLNG reported record production, reflecting the high quality of its assets. In the second half of FY21, APLNG’s earnings are expected to be benefitted from the recent rally in the oil and gas markets.  Looking ahead, the company intends to grow its customer scale and breadth of offerings via low-cost platform model delivering connected customer solutions. In order to improve its Gas portfolio, ORG is actively exploring options to incorporate new supply and capacity from Queensland, Victoria or LNG imports. For its electricity portfolio, ORG is exploring low-cost options to increase peaking flexibility and capacity.

Decent Growth in H1FY21 Operating Cash Flow: During the six months ended 31 December 2020, the company’s businesses generated decent cash flow, which allowed the company to reduce its debt level, pay a dividend of 12.5 cents to its shareholders. Further, the company also invested in various growth opportunities in line with its strategic priorities. Operating Cash Flow for H1FY21 stood at $669 million, up by $318 million on the previous corresponding period (pcp), due to lower working capital requirements and lower tax paid. Underlying profit for H1FY21 stood at $224 million, down by $304 million from pcp, mainly due to lower oil, gas and electricity prices.

Underlying EBITDA for Energy Markets stood at $635 million in H1FY21, down by 12% on pcp, reflecting lower wholesale prices, the one-off impact of higher network costs not recovered in regulated tariffs and cost of support for customers financially impacted by COVID-19. Integrated Gas Underlying EBITDA for H1FY21 stood at $566 million, down by 38% on pcp, due to the impact of lower oil prices on contracted LNG sales. As at 31 December 2020, the company had cash and cash equivalent of $474 million.

H1FY21 Results (Source: Company Reports)

Decent Operational Performance in FY20: For FY20, Australia Pacific LNG (APLNG) reported record production of 265 PJ (ORG share) and made record cash distributions to ORG of $1,275 million. Driven by record production by APLNG and a record cash distribution, the company’s free cash flow increased by $105 million to $1,644 million in FY20, compared to FY19. For FY20, the company reported an underlying profit of $1,023 million and underlying EBITDA of $3,141 million.

FY20 Results (Source: Company Reports)

Key Metrics: Gross margin for FY20 stood at 18.4%, up from 17.6% in FY19. EBITDA margin for FY20 stood at 8.9%, up from 7.3% in FY19. Current ratio for FY20 stood at 1.01x, up from industry median of 1.09x. Debt to equity ratio for FY20 stood at 0.54x.

Past 5-year Financial Performance for Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 24.98% of the total shareholding while the top four constitute the maximum holding. AustralianSuper and The Vanguard Group, Inc. are holding a maximum stake in the company at 10.43% and 6.02%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Strategic Partnership with Octopus Energy: In FY20, the company acquired 20% interest in Octopus Energy Group Limited, and an Australian licence for the Kraken customer platform. Following a partnership between Octopus and Tokyo Gas in December 2020, ORG announced additional investment of £36 million in Octopus Energy Group Limited to maintain its 20% equity interest. The company’s strategic partnership with Octopus Energy is delivering a radical improvement in customer experience and driving a material reduction in costs.  

Heads of Agreement Signed with Blue Energy Limited: On 19 March 2021, Blue Energy Limited (ASX: BLU), a Brisbane-based Australian exploration company, announced that it has inked a Heads of Agreement with ORG for up to 300 PJ of new long term gas supply from Blue Energy’s Northern Bowen Basin ATP814 coal seam gas tenure.

Key Risks: The company is exposed to the risks related to the changes in energy demand driven by price, consumer behaviour, mandatory energy efficiency schemes, government policy, weather and other factors that can create revenue uncertainty and impact future financial performance. The company operates in a highly competitive retail environment which can result in pressure on margins and customer losses. ORG is also exposed to the risk associated with fluctuation in the prices of oil and gas as it could impact the company’s financial performance. With an adjusted net debt of around $4.7 billion as at 31 December 2020, ORG seems highly leveraged.  

Outlook: Looking ahead, the company expects the partnership with Octopus Energy to reduce its capital and operating costs and extend its retail leadership over the coming years. In line with its strategy of pursuing growth in low carbon future, ORG is accelerating towards clean energy and is uniquely placed to deliver hydrogen at scale with capabilities across the value chain.

ORG’s Energy Market business is on track to achieve $100 million cost-saving target in FY21. In the second half of FY21, the company expects Australia Pacific LNG’s earnings to be benefited from the recent rally in oil and gas market. For FY21, the company expects Energy Markets’ Underlying EBITDA to be in the range of $1,000-1,140 million. Further, the full-year cash distributions from Australia Pacific LNG are expected to be between $575-675 million, at an estimated realised oil price of US$43/bb. Total capital expenditure for FY21 is expected to be $400-440 million.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has provided a return of 9.06%. The stock is trading below the average 52-week price level range of $3.990 and $6.480, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$3.995 and resistance of ~$5.657. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peers, considering the ongoing impact of COVID-19 pandemic, high debt level, and challenging near-term outlook for Energy Markets. We have taken peers like AGL Energy Ltd (ASX: AGL), Oil Search Ltd (ASX: OSH), Woodside Petroleum Ltd (ASX: WPL), etc. Considering the rise in H1FY21 free cash flow, expected cost savings in FY21, anticipated benefits from the partnership with Octopus Energy, decent long-term outlook, current trading level and valuation, we give a “Buy” recommendation for the stock at the current market price of $4.690, up by 1.735% as on 31 March 2021.

ORG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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