Stock: Origin Energy Limited

Stock code: ORG

Share Price: $15.86 (as at Friday 25th March, 2011)

Broker buys: 

Shadforth Financial Group (14/3/2011, share price was $15.66 that day)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

With the market down 6 per cent year to date and its shares down 17 per cent, Origin Energy successfully raised half of $2.3 billion rights offering last week. A good result, particularly in these tumultous times.

Analysts

Richard Batt of Shadforth Financial Group has a buy recommendation on ORG. Batt commented: “Origin and ConocoPhillips are joint owners of Australia Pacific LNG Pty Ltd (APLNG). APLNG recently signed a heads of agreement with Chinese company Sinopec to supply up to 4.3 million tonnes of LNG a year for 20 years. Sinopec will take a 15 per cent stake in APLNG. This is a significant development for Origin, as the benefits will go a long way to underpinning future growth.”

Currently 9 out of 12 analysts covering ORG have a buy or outperform rating.  Four outperform ratings and 5 buy ratings, while only 3 analysts rate at hold or underperform.

Consensus EPS for 2011 is 69.6 and 87.9 for 2012. Revenues for this year are forecast at $615.9 million, and $778.1 million for 2012.  While P/E multiple forecast for 2011 is 22.3 and 17.7 for 2012.  

Company Description   

Origin is a leading Australasian integrated energy company operating in Australia and New Zealand, servicing over 2.6 million gas and electricity customers. ORG was formed in February 2000 as Boral shareholders approved the de-merger of its energy business from the building and construction materials business.

ORG participates in most segments of the energy supply chain in Australia including gas, oil exploration and production, power generation, energy retailing, network ownership and management services. It employs around 3,250 staff. Origin conducts its business in the New Zealand through Contact Energy as a majority shareholder, at 51.4 per cent.

Origin’s full portfolio of operating businesses range from energy generation, alternative energy reserves and projects, including large coal-seam-gas reserves, LNG development, and renewable energy.

In natural gas and oil exploration and production business, Origin holds significant producing assets, operates onshore processing facilities and holds a portfolio of onshore and offshore exploration permits.

In the electricity generation business, Origin is the largest owner and developer of gas-fired power generation in Australia. Origin also produces renewable energy from wind farms. Origin’s total operating generation capacity of Origin’s power stations is currently 2,250 MW.

In Energy retailing, Origin is one of Australasia’s largest gas and electricity retailers, supplying energy to more than 4.6 million customers in Australia and the Pacific.

In October 2004, Origin purchased 51.4 per cent interest in Contact Energy supplying around 520,000 electricity customers and 75,000 gas customers. Contact generates around 27 per cent of New Zealand’s electricity.

Technical Picture

Origin Energy has spent the last 12 months trading between a $13.08 low and a $16.33 high.

In the last three months, ORG has traded in a downtrend – identified by lower lows and a lower high.  Technical analysts might note that the morning star doji suggests that the next price move could be to the upside.  Expect a test of the prior swing high in the $16.00 to $16.10 level.

The Offering

Last week Origin completed the institutional half of its $2.3 billion rights offering. The equity raising was to reduce the debt that financed the acquisition of power assets acquired from the New South Wales state government.  In December, ORG purchased the Integral Energy and Country Energy retail businesses and the Eraring GenTrader arrangements for $3.25 billion.

The deal was structured by Merrill Lynch, with Macquarie and JPMorgan part of the syndicate underwriting and managing the $2.3 billon 1 for 5 renounceable rights offer (177 million shares priced at $13 per new share). The retail leg is expected to open after the institutional offering. 

The retail component of the offer is expected to raise about $1.17 billion and will open on March 21 – and is slated to close on April 13. 

Origin said that 95 per cent of its institutional shareholders took up their rights at $13.  The remaining shortfall of about 4 million shares were taken up by institutions at $15 apiece.  Institutions that didn’t take up their entitlements will receive $2 a share, Origin said.

The structure gives retail shareholders, who do not wish to take up the offer, the opportunity to sell them on the ASX. They have 14 days from the date of the institutional offer. The structure gives retail shareholders the option of participating or not, and better aligns their price with that of institutions.  The structure was crafted by Merrill Lynch called ‘PAITREO’, or Pro rata Accelerated Institutional, Tradeable Retail Entitlement Offer.

Earnings

At the end of February, ORG reported that underlying EBITDA was up 16 per cent to $818 million on the prior corresponding period after adjusting for exploration expenses. Group operating cash flow after tax was $794 million up 87 per cent on the prior corresponding period.  Removing the impact of one-time charges, the underlying profit for Origin was $304 million for the six months to 31 December 2010.

Outlook

Origin anticipates that from the NSW energy assets and based on prevailing market conditions, underlying EBITDA to increase by approximately 35 per cent in the 2011 financial year when compared with the prior year. ORG also anticipates an increase in underlying profit of around 10 to 15 per cent when compared with the prior year.

Conclusion

Origin is currently trading 23X trailing earnings and has a market capitalisation of 13,756 million.  These are hardly lofty valuations given the fact that ORG management expects to see EBITDA grow by 35 percent next year. 

Using consensus EPS for 2012, at .87, and a multiple of 22, roughly values the at $19. 

All things considered, ORG might be a nice candidate for your watchlist, for further research.

 

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