Origin Energy Limited (ORG) Stock To Sell


Origin Energy (ORG) is involved in gas and oil exploration and production, power generation and energy retailing.

As a leading Australasian integrated energy company, ORG participates in most segments of the energy supply chain, including natural gas and oil exploration and production, electricity generation, and energy retailing.

The group has significant operations in New Zealand through its 52.8% interest in Contact Energy, New Zealand’s largest energy provider. ORG and Conoco Phillips each hold a 37.5% stake in the Australia Pacific LNG Project (APLNG), which supplies gas to power stations in South East Queensland.

ORG also has a 42.5% stake in the Victorian BassGass project (AWE owns 57.5%), which supplies gas to Victoria from the Yolla gas field in Bass Strait.

Weak start to FY13

It was a disappointing September quarter for ORG, which reported a 3% year-on-year on fall in revenue to $224.5 million.  This was despite a rise in average selling prices.

Production of 33.1 petajoules (pj) was 10% lower than the same period the year before as BassGass was shut down due to the Yolla Mid Life Enhancement project.

Whilst BassGass has come back on line, it has been a major headache for ORG.  The project’s cost has blown out from the original $345 million estimate in 2009 to up to $580 million.

The September quarter production numbers followed a solid FY12 result that included a 33% lift in underlying profit to $893 million. The Energy Markets business experienced strong 33% growth in underlying EBITDA, with electricity volumes rising 26% following the acquisition of NSW’s power assets.

Offsetting this, however, gas volumes in Victoria and NSW fell during the year due to mild weather.  Also, ORG was forced to pay more for natural gas and electricity, which impacted gross margins.

Poor FY13 guidance

ORG’s FY13 guidance was disappointing to say the least. The group forecast no growth in underlying profit, citing fewer new capital investments, volatile commodity prices, regulatory uncertainty and changing demand patterns in Australia.

Capital spending plans have been curtailed, with ORG instead focussed on the delivery of APLNG. As a result of this change in strategy, ORG recorded significant impairment of projects in FY12 including Transform Solar, wind and geothermal developments and other upstream assets.

ORG’s share of APLNG underlying EBITDA fell 25% on-year, driven by the group’s sell-down of its stake to 37.5% following an agreement with Sinopec, which upped its share from 15% to 25%.

ORG failed to provide clarity on the timeframe for the remaining divestiture of its APLNG stake.

Outlook

For ORG, the significant scale back of its capital spending plans signals a diminished growth outlook. Sentiment towards ORG has worsened considerably since the FY12 profit release in late August, with investors taken aback by the weak FY13 outlook.

We expect the negative sentiment to continue in the near-to-medium term, which is likely to further weigh on the stock price.

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