Company Overview - Origin Energy Limited (Origin) is engaged in the exploration and production of oil and gas, electricity generation, and wholesale and retail sale of electricity and gas. The Company's segments include Energy Markets, Exploration & Production, liquefied natural gas (LNG) and Corporate. Its Energy Markets business is an integrated provider of energy solutions to retail and wholesale markets in Australia and in the Pacific. It has exploration and production interests principally located in eastern and southern Australia, the Browse and Perth basins in Western Australia, the Bonaparte basin in north-western Australia, the Beetaloo basin in Northern Territory and in New Zealand. Its liquefied natural gas segment includes Origin's equity accounted share of Australia Pacific LNG, and also contains its activities and transactions arising from its operatorship of the Australia Pacific LNG upstream activities. Its Corporate segment includes investments in Chile and Indonesia's energy sectors.
ORG Details
Offloading non-core assets as a part of its divestment program: Origin Energy Ltd (ASX: ORG) reported that they made a share sale Agreement with Energy Developments which is the subsidiary of DUET Group, for selling its Cullerin Range Wind Farm for $72 million. Cullerin Range Wind Farm generates 30 MW supplying electricity into the New South Wales market. Origin has been divesting its non-core assets as a part of its $800 million asset divestment program, and with the Cullerin Range Wind Farm sale, the group delivered a total proceeds of $468 million till date. Cullerin Range Wind Farm sale accounts over 11.6x FY2017 EBITDA multiple for the group. Earlier, the group even sold Mortlake Pipeline to SEA Gas (Mortlake) Partnership (SEA Gas Mortlake) for $245 million. Mortlake Pipeline, is operated by a related party of SEA Gas Mortlake, and provides gas to Origin’s Mortlake Power Station in Victoria. The group got gas transportation and storage services on the pipeline for the long term. Mortlake Pipeline accounts over 14.4x FY2017 EBITDA multiple for the group. With these divestment efforts, the group intends to withstand the current turmoil in the oil prices. With the sale of Mortlake Pipeline, Origin had $396 million from divestments.
Delivering on Commitments (Source: Company Reports)
Enhancing reserves position via Waitsia gas field: Origin and AWE limited has equal partnership in L1/L2 and are Joint Venture partners in EP320 with AWE comprising over 33% stake while ORG has 67% stake. The Operator of L1/L2 in the northern Perth Basin, at Western Australia, AWE group reported that they witnessed a solid upgrade of 2P Reserves and 2C Contingent Resource for the Waitsia gas field. The gas field underwent rigorous extensive evaluation from the Waitsia-1 and Waitsia-2 wells and conducted extensive analysis from the Senecio-3 and Waitsia-1 wells. The new data indicated an upgrade in Gas in Place (GIP) and recoverable volume estimates, which led to an upgrade in 2P Reserves and conversion of 2C Contingent Resources to 2P Reserves. AWE reported that the Waitsia gross 2P Reserves were enhanced by 93% to 344 Bcf of gas wherein the AWE share comprised 172 Bcf of gas or 30.4 mmboe. Waitsia gross 2P Reserves plus 2C Contingent Resources enhanced by 30% to 630 Bcf of gas with AWE share representing 315 Bcf of gas or 55.7 mmboe. Overall gross 2P Reserves plus 2C Contingent Resources for Waitsia, Senecio, Irwin and Synaphea enhanced by 20% to 867 Bcf of gas with AWE share representing 432 Bcf of gas or 79.5 mmboe. AWE reported that given this strong reserves and resources prospects they would drill further appraisal wells in 2017.
Summary of changes to 2P Reserves and 2C Contingent Resources for the Waitsia field (Source: Company Reports)
Positive Exploration efforts with Beach: The group is a joint venture partner (representing 16.74% stake) with Queensland Gas along with Santos having 60.06% and Beach Energy (comprising 23.2% stake). Dunadoo-1, the first well out of the three well campaign, is aiming sands within the Toolachee Formation, having the Patchawarra Formation offering a secondary target. The well was spudded on May 2016 and Beach energy is conducting further at 2,391 meters in the Nappamerri Group. For South Australian Gas, the group has 13.19% stake along with Beach’s stake of 20.21% and Santos has a share of 66.6%. Accordingly, Tirrawarra-93, the first out of five-well development campaign was cased and suspended as a potential producer post the high-side gas pay outcome. The first well delivered a net gas and oil pay of 51 metres and 10 metres, respectively, within a 337 metre gross section in the Patchawarra Formation. Tirrawarra-92, the second well of the campaign, was spudded in May 2016 and Beach is drilling ahead at 3,490 metres in the Patchawarra Formation.
May drilling report (Source: Company Reports)
Contribution from APLNG project: Management reported that its APLNG project is nearing finishing post eight-years. APLNG project’s Train 1 has surpassed the nameplate capacity from the Bechtel Performance Test and shipped 22 LNG cargoes till date mainly for Sinopec. Management also reported that they estimate revenues from Train 2 from the third quarter of 2017. The group has contributed over A$1 billion from January 2016 until the project becomes self-funded. Train 1 four months’ revenue contribution would be included in the group’s FY16 underlying earnings. On the other hand, the uneven share of costs against revenue would continue in fiscal year of 2017 till the Train 2 revenue would be recognized. However, the Paris Agreement led the world on a path of decarburization resulting to a shift in energy mix towards gas and renewables. Origin intends to target this opportunity and accordingly is positioning itself on a long term basis with APLNG project. The group believes that it could support Australia’s obligation to cut carbon emissions by at least 26% by 2030 as compared to 2005.
APLNG project on track (Source: Company Reports)
Focusing only on solid value based projects for the coming years: Apart from APLNG project, Origin is focusing on solid prospects projects which have the capability to generate value in the coming years. The group’s Halladale Speculant project is forecasted to be online by early fiscal year of 2017 which would further contribute to the group’s production and earnings by FY2017. Speculant 1 and Speculant 2 flow test results from the project are as estimated while the group is balancing gas sales between domestic market and East Coast LNG projects. As per Yolla’s MLE Compression project is on track to enhance its production at BassGas by second quarter of 2017. Beetaloo exploration program is ongoing while the group is controlling the finding costs to enhance efficiency. For Kupe project in New Zealand, the field is performing better than estimated. At Western Australia, the Waitsia well confirmed strong reservoir properties and forecasts a reserves upgrade for Origin with First 10 TJ/d forecasted to be online by first quarter of FY17.
Controlling spending to offset commodity turmoil: The group is focusing to cut capital spend to withstand the commodity turmoil while improving their investment decision. The group is focusing on near shore and onshore development apart from APLNG project and continuously pursuing exploration opportunities within its current fields like Halladale/Speculant development, Yolla compression project and Beetaloo exploration. The group is implementing a better capital investment process and decision analytics which include tight enforcement of project stage gates and preparing for structured project pre-mortems to withstand risks and stress on-shore and near-shore E&P. ORG intends to cut over $100 million in Natural Gas & Electricity cash cost. The group expects its capital expenditure to decline to over $240 million in FY2016 which is a $55 million decrease as compared to FY2015.
Near term Milestones (Source: Company Reports)
Stock performance: The shares of ORG have rallied over 29.6% in the last six months (as of June 21, 2016) driven by the recovering commodity prices coupled with the group’s efforts to control costs to withstand oil prices volatility. ORG has a diversified portfolio and has been continuously building its asset base via its present projects. With the group’s APLNG contribution, ORG’s performance would improve further and the company is well positioned to leverage the booming LNG opportunity for the long term. ORG is also seeking to deliver better Natural Gas margins while maintaining Electricity margins for FY16. The group’s divestment program would continue to strengthen the balance sheet. ORG generated over 7.24% in the last five days (as of June 21, 2016) and we remain bullish on the stock. ORG also has a solid dividend yield. Based on the foregoing, we give a “BUY” recommendation on ORG at the current price of $5.88
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