Company Overview: Origin Energy Limited is an integrated energy company. The Company is engaged in exploration, production, generation and the sale of energy to households and businesses across Australia. Its segments include Energy Markets, Integrated Gas, Contact Energy and Corporate. The Company's exploration and production portfolio includes the Bowen, Surat and Cooper/Eromanga basins in Central Australia, the Otway and Bass basins in Southern Australia, as well as interests in the Browse and Perth Basin in Western Australia, and the Bonaparte and Beetaloo Basin in the Northern Territory. It also has exploration projects located in New Zealand in the Taranaki and Canterbury basins, as well as in Vietnam. It jointly owns and wholly operates gas-producing facilities in Australia and New Zealand, including the BassGas and Otway Gas Production plants in Victoria, coal seam gas (CSG) production plants as part of the Australia Pacific LNG Project in Queensland, and the Kupe Gas Project in New Zealand.
 

ORG Details

Strong Performance in the December 2018 Quarter: Origin Energy Ltd (ASX: ORG), which has the market capitalization of about $12.84 billion, is an integrated player in the energy sector. The company is involved in energy retailing, power generation, and business related with natural gas production across Australia, New Zealand, and internationally. The company is operating through broad segments, Energy Markets and Integrated Gas. Meanwhile, ORG during the December 2018 quarter, has delivered strong topline performance from Australia Pacific LNG (APLNG). This segment reported highest ever revenue of about $741 million (as per ORG’s share), representing a 45% growth in the quarter over the corresponding quarter in 2017.  Sequentially, the revenue grew by 16% over previous quarter of the year. Overall, the group has witnessed strong cash generation from APLNG and is also poised to benefit from generation fleet and ability to ramp up/ down the generation as per the market requirement.
 
Australia Pacific LNG’s strong performance is on the back of both higher realized LNG prices and favourable movements in the exchange rate; while APLNG continues to operate reliably at steady-state production levels, despite planned upstream maintenance. ORG’s share of production was maintained at 63 PJ during the quarter. The company during the quarter had loaded and shipped a total of 32 LNG cargoes. Net cash distributions of about $393 million were obtained from APLNG during 1HFY 19; and electricity volumes were down by 5% to 8.7 TWh in the latest December quarter (from previous corresponding quarter figure of 9.2 TWh). This decline was owing to  lower usage and customer numbers while Natural gas volumes were up 1% to 65 PJ than the December 2017 quarter at the back of short-term business sales (though offset by lower sales to generation). The volumes were still in line with seasonal demand (Energy Markets’ electricity sales volumes fell by 8% on September 2018 quarter & Energy Markets’ gas sales volumes fell by 21% on September 2018 quarter) as the Energy Markets businesses were lower over the quarter. During the quarter, ORG also invested capital for fleet generation in order to keep up with the supply to the market over the summer months. The company is updating Eraring, which is critical to power supply in NSW, which had experienced a major overhaul of one of its units.

Other operational updates: Origin is also updating a unit at Quarantine Power Station such that aero-derivative, fast-start capability can be enabled in order to establish better and more responsive operations. Moreover, during the December 2018 quarter, there has been a 10% rise in the LNG production on September 2018 quarter driven by higher customer demand, but declined by 5% on December 2017 quarter which was offset due to higher domestic volumes. There has been a decline of 20% in Domestic gas revenue on September 2018 quarter due to lower domestic volumes, but rose up 49% on December 2017 quarter due to higher volumes and higher realised average prices. Hedging costs rose by 53% to $78.1 million on September 2018 quarter on the back of losses on LNG hedging due to higher realised JKM prices and higher oil hedge premium amortisation.


December 2018 Quarter Performance (Source: Company Reports)

Price Strengthening for commodities during the December 2018 Quarter: During the December 2018 Quarter, Australia Pacific LNG’s effective oil price rose in the quarter to US$76/bbl from US$69/bbl in September 2018 quarter. In November, Japan Customs-Cleared Crude prices rose higher due to a market deficit caused by looming sanctions on Iran and also on the back of supply outages in Venezuela and Libya. During the first half of the quarter, there was a rise in LNG prices that later dropped a bit owing to sluggish industrial activity in China, combined with mild weather in Asia and high gas inventory levels in Europe. Further, new LNG liquefaction projects with higher supply also impacted the scenario.


Oil and LNG markets (Source: Company Reports)

Capital Management: The company’s priority is debt repayment until the target capital structure is reached. This is based on the assumption that that the market conditions do not significantly change or the regulatory and political environment does not adversely impact operations or prospects. ORG expects a fully franked 20cps dividend for the FY 19 financial year and the company expects to declare a 10cps fully franked interim dividend in the first half of FY 19. In future, the company will announce a dividend policy which will be  based on a free cash flow ratio at the time of announcement of full year results for FY 19. Moreover, the company’s capital management priority is to attain the investment grade credit through business cycle, and is targeting the grade BBB/Baa2. The company aims to offer balance sheet resilience. Currently, the company has investment grade of BBB-/Baa3 both with positive outlook. To attain the desired capital structure, ORG requires adj Net Debt/EBITDA to be in the range of 2.5-3.0x and gearing to be in the range of 25 – 30%.

Optimization of the debt portfolio: In order to optimize the debt portfolio, the company intends to reduce the interest expense through the extension of the time period, with maximum annual refinance to be greater than $1 billion, reduce the liquidity and lower distribution breakeven for APLNG. In FY 19 till now, ORG has reduced the interest expenses by $100 million. This is attained by refinancing the $4 billion bank debt at lower margins, and the company also redeemed €500 million ($A950 million) June 2018 hybrid. It has further reduced the liquidity by $3.4 billion in FY18. Meanwhile, APLNG has refinanced US$1.4 billion project finance debt through lower interest rate of 2.0%, deferred the principal amortisation (now Sept 2023 – Sept 2030) and has reduced the near term distribution breakeven by >US$2/boe. Additionally, for the next 18 months, the company plans to redeem €1.0 billion (A$1.4 billion) hybrid, save annually approximately $50 million, refinance A$1 billion with new 7-10 year tenor debt, reduce the excess liquidity by approximately $0.5-1.0 billion, continue to reduce refinance towers and APLNG to refinance further approximately US$3 billion to reduce distribution breakeven by approximately US$0.50/boe.


Savings Target (Source: Company Reports)

Future Outlook: For FY 19, ORG expects oil and LNG hedging costs to be in the range of $190 - $210 million. The projection includes the oil hedging costs to range between $115 - $125 million, that comprise of $34 million oil hedge premium and LNG hedging costs are expected to be between $75 - $85 million. For FY 19, ORG has reaffirmed its outlook. For FY 19, ORG expects higher underlying profit to further reduce the debt. Moreover, for FY 19, for Energy Markets, the company is projecting the Underlying EBITDA to be in the range of $1,500-1,600 million. For FY 19, for APLNG (100%), the company expects the Production to be in the range of 660-690 PJ. Further, it is expected that 250-300 operated wells will be drilled, targeting the operating breakeven to be in the range of US$22-26/boe and distribution breakeven to be in the range of US$39-44/boe. The costs for FY 19 is expected to be in the range of $60-65 million and the capital expenditure (ex-APLNG) to be in the range of $385-445 million. Additionally, for future, APLNG will go for further reductions in distribution breakeven to achieve approximately US$35/boe through further cost reductions and improvements in productivity. For Beetaloo, the company is targeting two independent liquid rich gas plays and other Australian onshore exploration for growth assets. In addition, in order to connect with high growth Asian LNG markets, the company has signed 20 years’ contract with Cameron LNG to buy 0.25 mtpa, which will commence in FY2020 and has commenced contract to supply for five years.

Stock Recommendation: ORG stock has risen 1.81% in three months as on February 05, 2019. The company’s stock is trading at A$7.33 and has an immediate support around $6.00 and resistance at $7.9 level. As per the December 2018 Quarterly Rebalance of the S&P/ASX Indices, ORG stock was removed from the S&P/ASX 20 Index, effective from December 24, 2018. On the other hand, ORG’s asset portfolio is well positioned on the back of renewables and firming, strong gas supply position and large retail customer base are expected to enable it to capture future energy needs. Further, APLNG is performing in line with the company’s expectations and is the major contributor to the domestic market. The company has the potential to grow its assets in future. Fundamentally, Origin Energy Limited happens to possess strong position with respect to the margins. The company had net margin of 1.9% in FY 2018 which implies the rise of 16.9% on the YoY basis reflecting the strength which is being possessed in the company’s top-line. This strength can act as the long-term growth catalyst for the company moving forward. Its gross margins in FY 2018 amounted to 20.1% implying the rise of 1.4% on the YoY basis. Also, the company’s return on equity or ROE has improved on the YoY basis. In FY 2018, its ROE was 2.4% implying the rise of 18.5% on the YoY basis. Also, the company’s total revenues have improved over the past 5 years (FY2014-FY2018).

On the technical analysis front, on the daily chart of Origin Energy Limited, Exponential Moving Average or EMA has been applied and default values were used for the purposes. After careful observation, it was noticed that the stock price has crossed the EMA and had trended in the upward direction signifying the bullish momentum. Therefore, there are expectations that the stock might witness upward momentum moving forward. Given the expected rise in earnings per share, a single digit stock price growth is expected for the next 24 months. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 7.33.

 
ORG Daily Chart (Source: Thomson Reuters)

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