Origin Energy: Sell down points to oil market optimism.

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
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

Price catalysts

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.

Risks

Commodity prices (oil, gas, electricity, carbon).

Energy markets regulation.

Upstream production, development and exploration.

Interest rates.

Tax regimes.

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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