Origin Energy released its fourth-quarter FY19 production report. The clear positive was the greater than expected distribution from the Australia Pacific LNG joint venture of $943m, versus guidance of $600–800m. This came primarily from lower capital expenditure due to the deferral of some activity.
We make the following observations:
- APLNG production for the quarter amounted to 2.1Mt (8.5Mt annualised), down 4% in the previous period, and represented a plant utilisation rate of 95%. Meanwhile, domestic gas sales of 48.8PJ rose 17%. Operationally, LNG output was lower than expected with the joint venture prioritising domestic gas sales over exports. Domestic gas prices of $4.89/GJ rose marginally on the previous quarter but remain well below peers.
- Electricity retail volumes fell 2% in FY19, with business volumes down 5%. This was attributed to the loss of higher-volume customers. Gas retail volumes also declined 4% in FY19, although business volumes rose 5% due to new wholesale contracts in Queensland. Overall, energy markets volumes were broadly in line with our estimates.
- Management indicated FY19 corporate costs would include an additional $160–180m of non-cash costs associated with rehabilitation provisioning of a gas works site in South Australia. We understand this is a non-recurring cost, although we expect it to be included in underlying net profit.
The inclusion of this additional cost, as well as minor adjustments to energy markets and integrated gas earnings, has resulted in a 15% reduction in our FY19 net profit estimate to $982m, well below the bottom end of consensus.
We have been positive on Origin Energy, due primarily to its strong cash flow generation, and the better than expected APLNG distribution has validated that view. However, we recently downgraded our recommendation to Hold from Buy on valuation grounds.