Origin Energy: LNG powering an earnings uplift
About the author:
- Author name:
- By Max Vickerson
- Job title:
- Date posted:
- 01 February 2022, 3:00 PM
- Sectors Covered:
- Industrials, New Energy
- ORG is set to receive an earnings boost from a big jump in 2Q LNG revenue.
- The Energy Markets business could face margin pressure with electricity sales shifting away from higher margin retail customers but the worst is behind it.
- We maintain our ADD rating and increase our target price (login to view) .
LNG was the 1H standout
APLNG's 1H22 commodity revenue was $3.9bn (100% APLNG basis), up 91% on the pcp and beat our forecast by 12%. Commodity prices surged with Asian spot LNG pricing averaging USD28/mmbtu during the quarter while production was relatively flat.
Electricity volumes grew 2% to 17.1TWh but makeup of sales has shifted away from higher margin sales to retail customers (-3% on pcp, -3% on forecast) towards lower margin business customers (+8% on pcp, +6% on forecast). Retail volumes were lower on mild summer weather and increased rooftop solar uptake.
LNG spot sales look good for 3Q but 1H electricity margins have a slight squeeze
ORG reported three spot cargoes sold in the December quarter and expects to sell five in the current quarter. Assuming that APLNG will sell its cargoes at the current benchmark price (USD27/mmbtu) during the period, we estimate this will push total commodity revenue to $4.4bn (100% APLNG) in 2H.
Our forecast for the average electricity price for retail customers in 1H21 is $237.50/MWh and $147.9/MWh giving a weighted average price of $191.2/MWh. After adjusting for the actual volume splits between retail and business demand, we reduce our weighted average price 1% to $189.50/MWh offsetting the increased volumes.
Forecast and valuation update
Our medium-term oil price assumption has been lifted across CY22-23 with current quarter Brent prices assumed to be US$84/bbl declining towards our stable long- term assumption of US$62/bbl.
The oil price increase lifts our valuation 8cps (higher gas prices in the Energy Markets portfolio offset some of the gains in APLNG) and the higher LNG spot sales another 16cps to $6.20ps.
We have also reduced our forecast for retail electricity consumption by 1.5% in the long term to account for the ongoing takeup of rooftop solar reducing average demand / customer.
We still think ORG is the best large cap in the domestic electricity market. The company has deleveraged its balance sheet and is reaping the rewards of the strong international gas market. As the local energy market recovers we think ORG is well positioned with a diverse and flexible generation portfolio.
We maintain our ADD rating with 12-month potential TSR of 14% on yesterday's closing price.
- Potential for ongoing tightness in oil prices and spot LNG markets.
- 1H earnings release on 17 February 2022.
- Exploration success in the Beetaloo or Canning basins.
- Commodity prices (oil, gas, electricity, carbon)
- Energy markets regulation
- Upstream production, development and exploration
- Interest rates
- Tax regimes
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