Origin Energy: Sell down points to oil market optimism.
About the author:
- Author name:
- By Max Vickerson
- Job title:
- Date posted:
- 26 October 2021, 10:30 AM
- Sectors Covered:
- Industrials, New Energy
- Origin Energy (ASX:ORG) is selling 27% of its stake in APLNG (10% of total APLNG equity) to EIG for $2.1bn.
- We expect the majority of funds to be used to reduce gearing slightly below the low end of the target 2-3x EV / EBITDA range.
- We maintain our ADD rating and increase our target price to (login to view).
Expecting more from less
Origin Energy (ASX:ORG) expects to realise $2bn after costs on the transaction which is expected to be complete by 31 December 2021.
Guidance for FY22 cash distributions to ORG remains at more than $1bn despite the selldown. Stronger oil prices which will flow through the LNG contracts should offset the smaller stake in the second half.
EIG’s minority stake will come with a board position and a proportionate share of the incorporated APLNG JV. ORG will retain its upstream operatorship.
Deal shows expectations of stronger for longer energy market
We estimate that the implied EV of APLNG is ~A$28.2bn or ~A$15/MMboe of 2P reserves. To get to that valuation we think a long term (post 2024) real price of oil of more than USD75/bbl is needed.
Given that EIG will hold a minority stake and that the JV’s LNG is almost entirely sold under long term contract we presume that EIG’s view is for sustained strength in LNG markets
Forecast and valuation update
We recently updated our oil price deck to lift near term prices but we have not yet lifted our long term assumption of USD62/bbl. We have increased our assumed cash flows paid by APLNG but have scaled these by ORG’s lower future share.
We have also revised our WACC estimate downwards to 8.1%, assuming a lower cost of equity of 11% (-1%).
ORG’s stake in Octopus Energy has increased in value significantly and we now recognise it at its implied carrying value from the GIM deal in late September, less the deferred cash payments ORG is required to make.
As we roll corporate costs and ORG treasury decisions into the Energy Markets line item we also include the expected cash at 30 June 2022 after an assumed $1bn debt repayment.
EIG might not be harbouring desires for a full takeover
EIG was reportedly a backer of Harbour Energy when it was courting Santos in 2018. We don’t think the approach it has taken to this acquisition indicates that it has immediate plans to increase its stake further.
As APLNG is not publicly traded there may be limited immediate pressure to push ORG’s share price up to the benchmark that EIG’s acquisition has set. We still see a disconnect between commodity prices and the share prices of oil and gas stocks.
We think there is value to be realised as the market regains confidence in the sector and in ORG in particular with a strengthened and stable balance sheet.
We retain our ADD rating and see 14% potential 12-m TSR with upside beyond that should oil prices remain elevated. At the transaction implied long term oil price our valuation approaches $7ps
1Q21 report due Friday 30 October.
Electricity spot market prices in the lead up to summer could set expectations for future hedged prices that will impact gross margins.
Commodity prices (oil, gas, electricity, carbon).
Energy markets regulation.
Upstream production, development and exploration.
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