Leveraged Exposure

AGL Energy (AGL, Hold) clearly has the best leverage to rising wholesale electricity prices given it is long generation, but Ord Minnett believes the market could be overlooking the benefits that these trends will have on the energy markets business of Origin Energy (ORG, Accumulate).


Origin Energy’s flexible generation portfolio allows the company to offset higher wholesale prices through increased generation output. True to this strategy, Origin Energy’s assets have been generating ~27TWh (annualised) since the start of CY17, 35% higher than 20TWh in FY16.


Meanwhile, we expect retail prices to increase materially, driven by higher wholesale electricity prices and higher hedge costs. With extra generation offsetting the additional cost of electricity procurement, we expect Origin Energy’s electricity portfolio to report expanding margins.


Financial leverage means the impact on valuation from expanding margins is material, with the impact amplified because of Origin Energy's relatively high debt. Overall, we have upgraded our FY18 and FY19 net profit estimates by 12% and 16%, respectively, and our net present value measure increases 12% to $7.96 a share.


Further near-term catalysts could also come from the upcoming sale process of the upstream business and potentially a refinancing of Australia Pacific LNG’s funding which could expedite Origin Energy’s deleveraging process.

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