Origin Energy: Guidance up but intervention weighs
About the author:
- Author name:
- By Max Vickerson
- Job title:
- Date posted:
- 20 February 2023, 7:00 AM
- Sectors Covered:
- Industrials, New Energy
- Origin Energy's (ASX:ORG) 1H result was well below expectations as a result of the very tight wholesale electricity market, increase in APLNG operating costs and higher tax burden on cash distributions.
- Electricity spot and futures prices have moderated though which takes the pressure off the generation fleet with customer tariffs set to lift next year.
- We maintain our HOLD rating given the uncertainty of the non-binding offer proceeding at $9ps.
1H result overview and guidance update
Underlying net profit was 83% lower than pcp and Visible Alpha consensus and 77% less than our forecast. Energy Markets (EM) was a key driver, 45% lower than pcp and consensus but our forecast largely anticipated this (-3%).
The tax burden was significantly higher than expected despite an underlying loss before tax when excluding APLNG’s contribution to net profit.
ORG is increasingly confident in the outlook for 2H earnings with EM EBITDA expected to be at the upper end of guidance ($600m - $730m). Cash distributions from APLNG in 2H are expected to be in the range of $617m - $817m.
Operating costs up at APLNG but total cash cost guidance constant
APLNG’s operating expenses jumped 54% over pcp but APLNG has kept its guidance for FY23 total spend constant at $2.5bn - $2.7bn. Higher numbers of well workovers and compressor maintenance are probably a key driver here which implies less spend on drilling.
Production guidance of 660PJ – 680PJ suggests a skew to 2H output, driven by catching up on the workover backlog. If drilling activity continues to slow into FY24 there is the potential that medium-term production may remain lower than the typical ~700PJ level.
Forecast and valuation update
We have reduced our forecast net profit by 15% - 20% in FY23 and FY24. This year is a shift to stronger EM EBITDA but offset by lower APLNG EBITDA. Next year we forecast smaller EM profit growth with the expectation that the industry will be under considerable pressure to limit increases in customer tariffs.
Our forecast now includes the impact of the LNG trades which lifts FY25 net profit significantly. Although, this is not something we have banked in over the long term given that recent favourable price movements may not recur in later years.
The net impact to our DCF valuation is a decrease to $5ps (-5%). We have adjusted for the dividend in the bid price ($8.84ps) and reweighted the chance of success to 50/50 to give a price target of (login to view), rounded to the nearest 10c.
We still see the unresolved bid as the key issue driving the share price. While government intentions toward the industry remain in flux we think it’s difficult to see the deal proceeding in line with the indicative bid.
It’s possible that it could proceed at a lower price, but a premium to the current share price so we retain our HOLD rating. We see a gap between fundamental fair value and the deal affected share price though, so investors may find better risk adjusted value elsewhere.
- Resolution of the non-binding bid.
- Third quarter report expected 28 April 2023.
- Successful completion of the takeover offer including conversion to a binding offer, receipt of regulatory and shareholder approvals.
- Availability of fuel and generation plant performance.
- Commodity prices (oil, gas, electricity, coal, carbon).
- Energy markets regulation.
- Interest rates.
- Tax regimes.
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