Company Overview: 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 mainly operates two businesses - Energy Markets and Integrated Gas. The company owns 37.5% interest in Australia Pacific LNG (APLNG), a 9Mtpa integrated LNG project backed by JV partners ConocoPhillips and Sinopec.

ORG Details

Positive Commodity Price outlook and Disciplined Cost Management to Drive Future Performance:

The company’s financial and operational performance during FY21 was impacted by subdued business activity, and lower realised oil prices mainly caused by the COVID-19 pandemic. However, in the last quarter of FY21, the company witnessed significantly improved operating performance, supported by higher realised commodity prices, higher domestic volumes, and improved wholesale electricity prices. In FY23, ORG expects a material rebound in the Energy Markets earnings, based on the commodity price outlook and customer tariffs. 

• Improving Wholesale Electricity Prices: During the June 2021 quarter, the wholesale electricity prices witnessed improvement, mainly due to unplanned baseload plant outages in the National Electricity Market and a winter cold snap, which also drove higher demand for gas.
• Improving Oil and Gas Prices: Due to the continued recovery in global oil demand and OPEC+ supply restrictions, the Japan Customs-Cleared Crude have witnessed improvement in the June 2021 quarter. Further, the Spot LNG prices have also improved, underpinned by ongoing supply bottlenecks and strong demand in Asia and Europe.
• Targeting Significant Capital and Operating Cost Savings: In order to offset the challenges for its Energy Markets business, ORG is targeting significant capital and operating cost savings through the introduction of the Kraken platform, a new low-cost and more efficient retail operating model.

Q4FY21 and FY21 Operational Highlights:

• Rise in Commodity Revenue for June Quarter: For the June 2021 quarter, the company’s Integrated Gas business reported commodity revenue of $507.6 million, up 19% from the previous quarter, driven by higher realised oil prices and higher domestic volumes.
• Decline in FY21 Capital Expenditure: APLNG’s capital expenditure in FY21 stood at $185 million, down by 53% on FY20, mainly due to the ramp down in drilling enabled by strong field performance, lower infrastructure spends and lower exploration and non-operated development activity.
• Stable FY21 Production: Despite a significant decline in capital expenditure, ORG reported stable production from APLNG, reflecting strong field performance.
• Decline in FY21 Gas Volume Sales: Although the company witnessed 40% QoQ growth in natural gas sales for the June 2021 quarter, the full year FY21 natural gas sales were down by 11% from the previous year, driven by the expiration of business contracts and less gas directed to generation due to a planned outage.
• Decent Cash Distribution from APLNG: For the June 2021 quarter, the cash distribution from APLNG stood at $320 million, up 158% on the previous quarter. In FY21, the cash distributions from APLNG stood at $709 million, higher than the guidance of $650 million.

Cash Distribution from APLNG (Source: Analysis by Kalkine Group)

H1FY21 Result Highlights:

• Rise in Operating Cash flow: For H1FY21, the company’s operating cash flow stood at $669 million, up by $318 million on the previous corresponding period (pcp), due to lower working capital requirements and lower tax paid.
• Decline in Underlying EBITDA for Energy Markets: The 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 the higher network cost.
• Decline in Net Debt: The company’s adjusted net debt reduced by $460 million from 30 June 2020 to reach $4.7 billion as of 31 December 2020.

Key Metrics:

For H1FY21, the company reported gross margin of 18.6%, slightly up from 18.3% in H1FY20. EBITDA margin for H1FY21 stood at 10.0%, up from 8.2% in H1FY20. Debt-to-equity ratio for H1FY21 stood at 0.44x, down from 0.50x in H1FY20. Current ratio for H1FY21 stood at 0.66x in H1FY21, down from 0.95x in H1FY20.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 25.50% 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 11.53% and 6.02%, respectively, as also highlighted in the chart below:

Source: Analysis by Kalkine Group

Key Risks:

• Stiff Competition: The company operates in a highly competitive retail environment which can result in pressure on margins and customer losses.
• Change in Energy Demand: 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.
• Fluctuations in the Prices of Oil Gas: ORG is also exposed to the risk associated with fluctuation in oil and gas prices as it could impact the company’s financial performance.

Outlook:

• FY21 Guidance: The company is set to release its FY21 financial results on 19 August 2021. As per the recent update, there is no change to the previous FY21 guidance. ORG expects Energy Markets Underlying EBITDA to be in the range of $940-$1,020 million in FY21. ORG is expected to recognise non-cash post-tax charges of $2,247 million in its FY2021 statutory income statement.
• Higher Distributable Cash flows: In the near-term, the company expects higher distributable cash flow, supported by improved oil prices and productivity at Australia Pacific LNG. In FY22, the net cash flow from APNLG is expected to be more than $1 billion as it benefits from a higher realised oil price
• FY22 Outlook and Guidance: The company anticipates that its Energy Markets business may face some challenges in FY22, however, these are expected to be offset by higher earnings from integrated gas, demonstrating the benefits of Origin’s diversified business. In FY22, the company expects its Underlying EBITDA for Energy Markets to be in the range of $450- $600 million. The Underlying EBITDA for Energy Markets is expected to improve by $150 to $250 million to $600-$850 million in FY23, provided current forward commodity prices continue and flow through into customer tariffs.

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

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 corrected by ~10.48% and is trading lower than the average 52-week price level band of $3.87 and $5.90, offering a decent opportunity for accumulation. We have valued the stock using P/E 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 such as AGL Energy Ltd (ASX: AGL), APA Group (ASX: APA), Oil Search Ltd (ASX: OSH), among others. Considering the company’s decent June 2021 quarter performance, improving oil, gas, and electricity prices, expected rebound in Energy Markets earnings, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $4.370, as on 4^th August 2021, 12:25 PM (GMT+10), Sydney, Eastern Australia.

ORG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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