Origin Energy: Regulator looms over strong APLNG performance

About the author:

Author name:

By Max Vickerson

Job title:

Analyst

Date posted:

02 August 2022, 10:30 AM

Sectors Covered:

Industrials, New Energy

• Origin Energy’s (ASX:ORG) 4Q highlighted the continuing trend for strong APLNG performance while the Energy Markets business struggles.
• Today the ACCC has called for the Federal Government to consider intervening in the domestic market via the ADGSM which casts uncertainty over ORG’s best performing asset.
• We maintain our HOLD rating but increase our target price to (login to view) after updating our financial forecasts. We see higher risk and limited upside with ORG compared to pure plays like WDS or AGL.

APLNG still supporting weaker Energy Markets

APLNG’s production and sales volumes were in line with our forecast but 2H22 commodity revenue beat our forecast by 7% with average prices more than doubling in A$ terms. Net of oil hedging, cash flows from APLNG were $1.43bn near guidance and in line with our expectations.

Total electricity sales were in line with our 2H22 forecasts but there was a shift from retail towards business (-3% and +4% respectively on our forecast). Gas sales beat our 2H22 forecast by 4% but, similar to electricity, there was a shift from retail to business (-19% and +12% respectively on our forecast).

Eraring output up in July but so are the risks

We estimate that Eraring’s average output climbed 6% to 61% of nameplate capacity during July which the company has attributed to better railed volumes. This does take some pressure off the company while prices remain elevated and presumably volumes will climb when Mandalong production climbs. However, ORG remains exposed if rail performance drops.

Increasing business customer volumes mean that margins will improve within that segment as older, cheaper contracts roll over but overall margins may suffer as volumes shift away from retail.

We also note the potential for government intervention to limit LNG exports. This may limit the ability of APLNG to sell spot LNG cargoes in the future.

Forecast and valuation update

We have updated our contracted LNG price assumptions with the most recent Morgans brent oil price deck which lifts our valuation by 26cps.

Our view on FY23 Energy Markets EBITDA has also improved as we have reduced our expected cost of hedging given higher Eraring volumes. This lifts our forecast to $637m but forecast lower long-term gas margins reduce our valuation by 18cps.

We also update our Octopus valuation adding another 10cps.

Prefer pure plays in this environment

We maintain our HOLD rating despite our higher price target. The strongest part of ORG’s business is its exposure to oil-linked LNG exports from its APLNG share but we think there are cleaner, less risky ways to get exposure, such as WDS.

ORG will need to walk the tightrope that is the domestic energy market as the outlook remains darkened with limited output from Eraring and a key gas contract due to be repriced in FY24. We continue to see AGL as being much better positioned in the electricity market while high prices persist.

Price catalysts

2H22 costs of Energy Markets will be known at the release of the FY22 report on 18 August.

We anticipate guidance at the result will be limited, or have a larger number of caveats for FY23 given the significant number of unknowns in Energy Markets.

Risks

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