Origin Energy: APLNG continues to benefit from tight LNG market

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
02 May 2022, 8:00 AM
Sectors Covered:
Industrials, New Energy

  • 3Q APLNG commodity revenue jumped 15% qoq as oil and LNG markets remain tight.
  • Energy Markets is benefitting from increased electricity sales volumes but we remain concerned about rising fuel costs depressing FY23 earnings.
  • We think the strength of APLNG’s performance is broadly in line with expectations and we see downside risk through Eraring’s coal exposure. We therefore retain our HOLD rating with an updated target price to (login to view).

3Q22 result summary

APLNG’s commodity revenue was up 15% qoq to $2.58bn despite sales decreasing 5% due to wet weather impacts on field production.

Electricity sales increased 7% on pcp driven by a 16% increase in C&I volumes, partially offset by a 4% decrease in retail. Natural gas sales to external customers declined 6% on pcp.

Analysis

APLNG’s quarterly production was largely as we expected (-1%). 3Q22 commodity prices were ahead of our 2H expected average for both LNG and domestic gas.

We have therefore lifted our spot domestic gas price significantly higher to $12/GJ given the achieved prices in 3Q and current offers on the Wallumbilla hub but we have not lifted our long term expectations for spot prices yet.

We see different influences impacting Energy Markets in the short and long term. ORG’s increasing business volumes should lift earnings, despite a likely small decrease in gross margin from smaller retail sales.

In the short term however we have increased our expected coal costs slightly given the ongoing tightness in supply. We estimate that an A$10/t increase in coal prices would lead to a ~$20m decrease in FY23 after tax earnings assuming the 6.5TWh of generation from Eraring that we have allowed for.

We think Eraring’s pattern of generation output suggests that ORG is managing its output carefully. High wholesale prices are attractive but clearly there is also a need to preserve stockpile volumes while future supplies are being negotiated. We continue to see this as a significant downside risk for the company.

Forecast and valuation update

We have lifted our net profit expectations for FY22 (+5%) given the strong performance from APLNG’s spot sales in 3Q which is likely to continue in 4Q. In FY23 we are more concerned about the risk to Eraring’s profitability from the fuel shortage and lower our net profit forecast by 2%.

Flowing through the higher C&I electricity sales in the longer term lifts our valuation of Energy Markets delivering an increase in our total valuation to (login to view).

Investment view

We think the strength of the APLNG business is largely priced in and because of our concerns about ORG’s Energy Markets exposure we retain our HOLD rating.

It’s possible that ORG could realise additional value from its non-core assets such as its Beetaloo Basin JV, or its equity position in Octopus but this is not our base case assumption.

Risks

  • Availability of fuel, generation performance and renegotiation of Eraring fuel contracts.
  • Customer energy demand leading to a short energy position in an expensive market.
  • Commodity prices (oil, gas, electricity, coal, carbon).
  • Energy markets regulation.
  • Upstream production, development and exploration.
  • Interest rates.
  • Tax regimes.

Find out more

Download full research note

If you would like access or more information, please contact your adviser or nearest Morgans office.

Request a call  Find local branch

Need access to our research?

You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team

Create trial account 

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.

Add your comment

 
 

 
  • Print this page
  • Copy Link