Origin Energy: Gas lifts H1 profit

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
22 February 2019, 9:55 AM
Sectors Covered:
Industrials, New Energy

Key points

  • HY19 results for Origin Energy (ORG) outperformed, driven by gas sales to business customers and APLNG sales benefitted from strong oil prices in the half year.
  • Dividends outperformed at 10 cents per share fully franked as per the 2018 Investor Day guidance.
  • Future dividend policy to be confirmed at the FY19 results.

Energy Markets busy with gas and APLNG buoyed by Brent

Gas sales to business customers delivered a strong boost to profits. Sales volumes varied by state but were up 14% overall (102.1PJ vs 89.8PJ in the previous corresponding period) and realised prices improved by 22% ($10.18/GJ vs $8.37/GJ in the pcp).

ORG's share of APLNG's underlying EBITDA increased by 43% ($900m vs $630m in the pcp) largely as a result of strong contracted LNG prices from the oil prices during May 2018 - October 2018. LNG contracts typically have a two month lag on oil prices so the sharp drop in oil in November and December won't be felt until 2H19.

2H19 likely to be weaker as lower Brent prices flow through

ORG has flagged that 2H19 Energy Markets earnings will likely be weaker than H1 and lower oil prices from November 2018 onwards will flow through to lower APLNG earnings. ORG has held its guidance for Energy Markets' underlying EBITDA at between $1.5b - $1.6b.

Low dividend yield now but guidance likely to improve

The dividends for H1 19 have been confirmed at 10 cents per share fully franked and the guidance is that the final dividend will also likely be 10 cps fully franked. ORG's policy for future years will be announced with the full year results later this year.

We are forecasting a significant increase to dividends as the cashflows from APLNG significantly improve over prior years. We forecast a yield of 7.5% for FY20 based on our price target. This yield may increase further in later years unless ORG gets more aggressive on growth capex or is more cautious on growing dividends despite increasing cash flow.

Investment view

The boost to profits in Energy Markets from natural gas sales was unexpected. However, full year guidance is unchanged for the division and lower oil prices will dampen APLNG's earnings in 2H. As such, we don't see a fundamentally different outlook post the 1H result. 

We believe ORG still trades at a discount to fair value despite the share price growth in the last 3 months. The two major catalysts on the horizon are the Federal Election which will determine electricity market regulation and the full year results for the dividend policy update.

We increase our share price target and retain our Add recommendation.

More information

Morgans clients can login to view our detailed report and increased share price target for Origin Energy (ORG). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

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.

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