Debt Focus, LNG Savings

Origin Energy recently held its 2017 investor day and we have reaffirmed our positive view on the stock. The focus remains firmly on lowering debt, although management did flag some growth opportunities with all parts of the business contributing as follows:

 

  • Proceeds from the Lattice Energy sale are due in early CY18.
  • Asia Pacific LNG (APLNG) is now expected to achieve a distribution breakeven point of less than US$40 per barrel of oil equivalent.
  • Energy Markets operating earnings (EBITDA) are expected to grow 15–20% in FY18, with potential increases beyond that.

The key focus of the investor day was on the implementation of cost savings at APLNG. The joint venture is targeting a 50% reduction in vertical well costs and a 30% reduction in operating costs from FY19. Combined, these savings are expected to result in cost reductions of $500m per annum.

 

Origin’s net debt amounted to more than $8bn as at 31 October, excluding the proceeds from the $1.585bn sale of Lattice Energy which has not yet concluded. The remaining hurdle for the Lattice Energy sale is final approval from the New Zealand authorities – while no timing was given for this, the sale is expected to be completed by early CY18.

 

Management highlighted lowering debt as a near-term catalyst for the stock and reiterated guidance for net debt below $7bn by June 2018. Dividends are likely to be reinstated only when Origin achieves its targeted capital structure.

 

The key announcement on Energy Markets was guidance for the Eraring power station to increase its power generation by 12–15% in FY18 on FY17, due to a new 4Mtpa coal contract. Energy Markets EBITDA guidance of $1.7–1.8bn was retained – despite higher Eraring output – but management suggested earnings could be influenced by the summer months, possibly implying some conservatism.

 

Incorporating lower APLNG costs and some other adjustments has led us to raise our target price for Origin to $9.50 from $9.15 and maintain our Accumulate reco

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