Origin Energy: Energy Markets outlook drops again

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
18 April 2021, 4:30 PM
Sectors Covered:
Industrials, New Energy

  • Origin Energy (ASX:ORG) announced an 8% drop in its guidance for FY21 Energy Markets EBITDA on increased gas prices and ongoing electricity weakness.
  • The guidance for cash distributions from APLNG has increased to over $650m and we flow through higher near term oil price assumptions.
  • We think Friday’s 9% fall in the share price was excessive given the positive outlook for the APLNG business and other growth possibilities.
  • We maintain our ADD rating but lower our price target (login to view).

Energy Markets hit with gas hike and ongoing electricity weakness

ORG announced that it is lowering its guidance range for FY21 Energy Markets (EM) EBITDA to $940m - $1,020m from $1,000m - $1,040m.

Approximately 39% of the drop is driven by an adverse ruling in a dispute with Beach Energy on Victorian gas (~$35m in FY21, ~$70m in FY22) repricing and the remainder attributed to ongoing electricity market weakness (~$55m).

We have lowered our FY21 EM EBITDA forecast to $980m, primarily on higher gas costs as we are already carrying a conservative electricity margin forecast.

ORG also highlighted its expectations of material impact in FY22 EM EBITDA but we are already allowing for a $200m drop in EBITDA from weak electricity markets.

APLNG lowers breakeven forecast and lifts cash distributions

Strong upstream performance at APLNG has allowed ORG to further reduce its USD distribution breakeven estimate by ~USD1.5/bbl. The guidance for cash distributions from APLNG has also been lifted to the upper end of the range to over $650m.

We estimate that at the free cash flow level this will result in net reduction of $9m offsetting most of the impact from Energy Markets.

Additionally we also flow through higher oil price assumptions in the near and medium term but leave our long term price forecast steady.

Costs outs, green hydrogen and frontier oil and gas

ORG is working on realising cost improvement from its investment in the Kraken platform ($70m - $80m forecast in FY22 rising to $100m - $150m in FY24) as well as longer term growth options in green hydrogen and oil and gas exploration and production in the Northern Territory and Western Australia.

We’ve factored in some savings for Kraken but we’ve not yet attributed much value to the early stage work on green hydrogen or the gas fields outside of APLNG.

ORG believes it could begin deliveries of green H2 from Townsville by the mid-2020s and is continuing to actively explore the Beetaloo basin. It’s not likely the company will derive short term benefits but importantly it is investing now to develop growth options.

Investment View

There is no doubt that the next 12 – 18 months will be challenging for ORG. We have long forecast that FY22 will be a low point for the business given that electricity futures have been pointing to weaker earnings for some time.

However, the company is expecting to offset weaker revenue with cost reductions and its LNG business will reap more of the benefits of higher oil prices in FY22 given the lagged impact in LNG contracts.

ORG remains our preferred exposure over AGL given its earnings diversity and comparatively smaller reliance on coal generation. While we expect near term challenges, we see upside potential in the medium term and maintain our ADD rating with a new price target (login to view).

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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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