Origin Energy: Energy markets performance will drag

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Max Vickerson
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By Max Vickerson
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Date posted:
04 November 2019, 2:15 PM
Sectors Covered:
Industrials, New Energy

  • APLNG delivered a solid result last quarter with production up 3% and revenue up 7%, which was also helped by favourable commodity prices. 
  • The first quarter performance of Energy Markets was less impressive though with Electricity volumes down -8% and Natural Gas volumes down -7%. 
  • We have reduced our expectation for Energy Markets Underlying EBITDA to the low end of the guidance range to $1,355m. 
  • Beetaloo drilling results are a potential catalyst but we anticipate the complexity of full commercial development will limit the market’s reaction this year. 
  • We downgrade our rating to HOLD. (Morgans clients can login to view detailed reports and price targets)

First quarter solid for APLNG

APLNG’s production was up 3% to 66.5PJ (ORG share) and revenue up 7%.

While oil prices in USD terms were lower, the weaker $A has lifted the effective price received by ORG and boosted revenues.This is a solid result for APLNG and we lift our forecast of ORG’s share of EBITDA to $1,852m (+2%) accordingly.

We also note that settlement of the Ironbark transaction occurred in August this year, raising our free cash flow forecast.

Energy markets looks like it failed to fire 

Volumes were down -8% for Electricity sales and Natural gas -7%.

While ORG hasn’t reported the revenue impact yet we can infer from flat retail pricing trends and wholesale market prices that it’s likely that the Energy Markets segment will weigh on performance at the half year result.

We will be looking for updated customer numbers at the half year result but we’re anticipating a drop in both Retail and Business customer numbers as well as average usage per account.

We have lowered our forecast for Underlying EBITDA for the Energy Markets segment to the lower range of guidance at $1,355m.

Beetaloo could be an upside catalyst but clarity will take time

The Kyalla 117 N2-1 well was spudded on the 9th of October which means that ORG might have drilling results available by the third quarter this year.

ORG has reported 4.6Tcf of 2C resources (ORG share) from its 70% interest exploration permits alongside Falcon Oil and Gas  (TSX: FO).

A resource this size has the potential to drive significant earnings for ORG in the future.However, we think that even if the appraisal well is successful ORG will still need time to create a credible development strategy to commercially produce its gas.

We see the Beetaloo as a more likely catalyst for ORG in FY21. 

Investment view

Our expectations are that Energy Markets will likely weigh down the performance of the company in FY20 and we don’t see any significant upside catalysts within the next 12 months for APLNG.

Our long-term view of upside in the Brent oil price hasn’t changed but we think there’s not enough upside in our valuation to warrant buying the stock here.

Given the volatility in oil prices we think there's a reasonable chance investors could have better opportunities to take a position in the stock in the future.

We downgrade our rating to HOLD and reduce our price target (login to view price target).

More information

Morgans clients can login to view our detailed report and increased share price target for Origin Energy (ORG). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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