Why do we like Origin Energy

We recently met with Dan Moore - analyst from Investors Mutual to discuss Origin Energy.

In this podcast we discuss the reasons why Origin Energy is attractive to investors.





Transcript of Podcast


Why do we like Origin Energy?

Mark Draper: Here with Dan Moore, analyst at Investors Mutual. Thanks for joining us.

Dan Moore: Thanks Mark.

Mark Draper: And today we are talking about Origin Energy which is an energy retailer in Australia and what people don’t know is that they are building a LNG plant in Queensland, so Dan what is the attraction of this business to you guys when you look at it from an investment perspective?

Dan Moore: Sure thanks Mark, what we like about Origin is it sort of has two parts to the business. The first part, as you said, is sort of utilities business which evolves power generation and its electricity retailing business. That business is quite a stable business, it is a business that has been stable for a long period of time. That business makes about sixty five cents per share of earnings which funds their dividends so they pay about fifty cents dividends every year and have for a number of years and we can see that going forward for quite a long period of time. At the current share price, it is close to a five percent yield so when you are buying it today, you are getting a company which can pay a five percent yield sustainably. Then the sort of I guess the upside is the LNG business. And APLNG is what it is called and it is a massive LNG project in Gladstone. Origin spent eight billion dollars and they earned thirty-seven and a half percent of the project so that is a big project and that is not delivering any earnings at all today. In two years the business will earn about sixty five cents based on our assumptions for oil price and currency which is about seventy five cents Aussie dollar and about sixty five dollars for oil. The current oil price is high fifties so we sort of see at the moment we get a company which is almost paying a five percent yield based on the existing based business but in two years, you know that yield, maybe not double, but go up over fifty percent, you know, based on relatively conservative oil price assumptions and currency assumptions so we see we get a bit of both. We have got some stability and then some upside from this new project.

Mark Draper: And in terms of the oil price, if the oil price was to go above sixty five dollars because there are some in the marketplace who believe the medium term oil price will go to closer to one hundred, what are the upsides you are talking about then if the oil price goes above sixty five?

Dan Moore: Yes, it is a very good question and because the project has a lot of fixed costs, the leverage is quite significant. It almost, I have got some assumptions and some sensitivities here between sixty dollars a barrel of oil and eighty five, the earnings is double so for every twenty five dollar increase in oil the earnings from APLNG will actually double so the upside is significant. Leverage can work both ways but we sort of feel, with our assumptions of around sixty five to sixty dollars a barrel, we think that is a conservative assumption where they can make good money. The upside is free and it will be great if it happens but using conservative assumptions we still think it is really cheap.

Mark Draper: And finally what do you think are the major risks of that stock at the moment as things stand at the moment but with respect to balance sheet and any other things that you can see.

Dan Moore: I guess that short term oil price volatility, you know, could see the stock bounce around a little and probably the other risk is the ramp up of the LNG plant. Sometimes in the commissioning phase there are some risks but with this sort of plant, our analysis shows it is relatively low risk. The operator Conoco Phillips has done this many times before, they are an experienced operator and while it is a risk, we are relatively comfortable with where the company is.

Mark Draper: Dan, thank you for that, for the fine review of Origin Energy. Thanks for your time.

Dan Moore: Thank you.



This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306