Origin Energy: Value in search of a catalyst
About the author:
- Author name:
- By Max Vickerson
- Job title:
- Date posted:
- 20 August 2021, 8:30 AM
- Sectors Covered:
- Industrials, New Energy
- Origin Energy's (ASX:ORG) FY21 underlying net profit was stronger than expected (+28% on Morgans forecast and +18% on consensus).
- The company provided additional guidance on total EBITDA which fell short of expectations but cash flows are looking solid.
- We still continue to see significant value upside and retain our ADD rating.
Mixed FY22 outlook
The market reaction was mixed with the stock falling 5% in early trade, recovering and drifting to close down 4%.
ORG had previously provided guidance for Energy Markets and today it issued guidance for total company underlying EBITDA which fell short of our expectations (-13%) and consensus (-9%).
Offsetting this was much stronger cash flow guidance with ORG pointing to the potential to receive more than $1bn in distributions from APLNG in FY22. This exceeds our estimate of APLNG free cash flow by 8%. Additionally this points to a lower minimum cash requirement than we’d assumed necessary.
APLNG will bolster the balance sheet but production unlikely to grow
The strong cashflows from APLNG will offset the lower expected earnings in Energy Markets and we forecast that the company can maintain its adjusted net debt to adjusted EBITDA ratio below 3.3x in FY22 (we previously estimated 4x). We expect modest recoveries in both gas and electricity margins in FY23 which will further drive the ratio down towards 2.6x.
We can’t overlook the lower-than-expected implied APLNG EBITDA. We estimate that when other Integrated Energy costs and corporate overheads are stripped out, guidance implies an FY22 APLNG EBITDA of between $1.65bn - $1.8bn. ORG’s guidance on total operating and capital expenditure excluding third party purchases points to lower revenue or higher reliance on third party gas than we’d anticipated.
Reservoir performance has been better than the JV participants expected and has allowed them to extract cash from APLNG. However, this points to negligible production growth in the medium term from slower drilling in FY21 – 22.
Forecast and valuation update
Our medium term outlook for Energy Markets has improved with an expectation that the impact on electricity margins from higher fuel costs at Eraring will be limited. Conversely though we have reviewed our assumptions for the gas portfolio to allow for increasing volumes of higher priced gas from legacy contracts.
We have rolled forward our model and kept our valuation steady at (login to view) per share with only slight reductions in our APLNG valuation (-1%) and no significant movement in Energy Markets (<0.1%).
We retain our ADD rating given the potential value upside we see (12 month potential TSR of 31%). We think APLNG cash generation potential is compelling and we expect Energy Markets to begin recovering in FY23.
A potential split of ORG’s Energy Markets business from its Integrated Gas business could unlock value. We suspect that the portion of the market that is looking for oil price exposure would value the APLNG assets more highly if they were separate to the energy generation and retailing business.
The draft 2022 Victorian default offer price will be released in September 2021.
Commodity prices (oil, gas, electricity, carbon).
Energy markets regulation.
Upstream production, development and exploration.
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