Origin share price has been tracking the ups and downs in the oil price. Origin is essentially trading like an oil company. Like Woodside, the future of the company is driven by LNG which is priced off the forward oil curve.
We hold Origin Energy shares (ORG) in our core portfolio and use the stock as our primary exposure to oil price. But first we have to declare that we got in early, way to early. It is currently trading significantly below our intrinsic value. We participated in the most recent dividend reinvestment plan to reinforce our belief in the stock.
Origin Energy Forecast (FY16 and FY17)
Management provide guidance as part of the capital raise in 2015.
- ORG guided FY16 underlying EBITDA of $1.45 – $1.55 billion which includes $110 – $230 APLNG EBITDA based on assumption of USD $54 per barrel oil price and 0.73 cents AUD
- FY17 EBITDA of $1.9 – $2.1 billion assuming USD $59 per barrel and 0.73 cents AUD
- Reduced dividend to 20 cents per share in FY16 and FY17. This could be upgraded if oil price recover.
While it is disappointing the capital raise did not occur earlier, the full extent of damage from lower oil price could not be held back any further. It is better late than never and post raise, balance sheet risk on ORG share price has reduced significantly.
The capital raise is aimed to limit the risk of death spiral where the continual apprehension of a potential equity raise pushes the share price lower to a level where a meaningful capital raise is impossible.
ORG Share Price
Chart below shows the year to date performance of ORG vs ASX 200 and its listed peers.
ORG 2015 Full Year Results
Origin reported disappointing full year results with a statutory profit loss of $658 mil driven by one off items. (at least Challenger reported good results)
Management used underlying profit which exclude the one off items fell $31 mil at $682mil vs $713mil previous corresponding period. EPS is 61.7 cents per share.
Financials are messy due to ramp up of APLNG spend and removal of contact energu. Contribution to APLNG was $2.16 bil in FY15.
Why Origin (ASX ORG)?
We see Origin in 2 parts. It is one of the largest utility and exploration and production company in the ASX 50.
First is a regulated utility which fixed rate of return on capital. This is where currently the income and cashflow is created to support the growth story.
The second angle on Origin energy shares is the Liquefied Natural Gas (LNG) story. LNG will be the primary growth driver in earnings and dividends growth from 2016 onwards.
Origin energy shares APLNG project with a number of partners and its primary customer Sinopec. It owns 37.5% of the project. It came online in December 2015 and ramping up production through first half of 2016.
LNG sale prices are linked to oil price through an S curve pricing mechanism. Hence future ORG income is conditional on the future oil price.
There are a number of LNG projects in Australia that are set to come online in late 2015 and 2016. These projects in addition to the current weak oil price are what we feel the causing the negative sentiment hanging over Origin share price.
We see value once the APLNG project come online is even at these prices. ORG will derive significant cashflow from the project.
On a wider macro view, the increase in LNG sale will also support the Australian dollar which offset the export income loss from coal and iron ore. It will be a key factor in leading its out performance over soft commodity currencies like the NZD dollar.
Derisked Balance Sheet
ORG ASX undertook a number of steps to derisk its balance sheet in the face of a lower energy price environment.
1. Sale of Contact Energy Stake
Origin sold its 53.09% Contact Energy stake at the lower end of expectations of $1.5 – $2.0 bil NZD. Final price tag $1.4 billion plus $200 million dividend. Sale value result in full year impairment of $265 million verses book value.
ASX ORG owns 53.1% of New Zealand Contact Energy as of Dec 31 2014. We are always of the view that balance sheet is king in any of our investments.
A strong balance sheet creates implicit options to take advantage of opportunities as they arise. Aside from oil price, another main cause in the fall in the ORG share price is the potential risk of debt burden.
Post Contact Energy sale, the risk of capital raise was lowered but persistent low oil and market aversion to highly leveraged entity pushed its hand.
The risks in investing in ORG is magnified through the use of margin loan. This is why investors examine closely before deciding to use leverage in the portfolio.
2. Origin Energy Capital Raise
The original sin of ORG is the high debt level used to fund APLNG and waited too late to raise capital. It announced a $2.5 billion entitlement offer to raise additional equity capital when it was caught off guard in the fall in oil, and realized it cannot whether the current downturn.
The utility business require a strong credit rating for its day to day operations. It simply cannot afford a credit rating downgrade.
- Capital raise structured as a 4 for 7 entitlement offer for the current shareholders.
- Offer price for the new shares are $4.00 per share which is a 34.4% discount to September 29th closing price and 25% discount to the ex-rights price (the large discount to ex-rights price can be seen as harsh for current shareholders not taking up the entitlement. Probably used as a carrot to get the underwriters to sign the underwriting agreement).
- If all existing shareholders take up the offer than theoretically there is limited value loss (ex cost for the investment banks).
Origin Energy Share Price Catalyst
– Further weakness in oil price
– Risk of takeover as even with significant premium. The price would under price the company verses when APLNG comes online in FY17. If we have the choice of taking the money today or wait. We would rather wait as the 2017 value would be much higher than any potential offer today.
Royal Dutch Shell made an offer for BG once their Gladstone project came online. If anyone would make a move, they will wait until a time closer to APLNG coming online or immediately after full production.
Origin Dividend History
Dividend is expected to be flat going forward until late 2017. Once cashflow from LNG sale is more certain than we expect a ramp up in payout ratio. This is conditional on oil price being supportive.
ANZ Dividend Dates 2017
Origin is not expected to pay a dividend in 2017.