Off to the Beach

Origin Energy has agreed to sell its oil and gas business, Lattice Energy, to Beach Energy for $1.6 billion. As part of the sale, Origin has entered into long-term gas supply agreements with Lattice Energy, with pricing consistent with the company’s FY18 energy markets guidance for operating earnings (EBITDA) in the range of $1.7–1.8 billion. Completion of the sale is subject to government and regulatory approvals.

 

In our view, the sale is broadly positive based on the following:

  • It will allow the company to realise value for a non-core asset that had been capital constrained and likely undervalued within Origin;
  • Origin will retain long-term access to gas supplies from the assets, as well as being able to significantly deleverage its balance sheet; and
  • The divestment will simplify the business and allow Origin’s integrated gas business unit to focus on its unconventional gas expertise.

We estimate Origin will be able to deleverage by $1.0–1.1 billion after allowing for the unwinding of oil hedges and the Otway transaction announced earlier this month. We now forecast net debt at the end of FY18 at $6.5 billion, compared to management guidance of “under $7.0 billion”. Importantly, the company’s debt metrics also look healthier with our forecast of a net debt/EBITDA multiple of 3.7x by June 2018 falling to 2.1x by June 2019.

 

Beach Energy disclosed in it its announcement that its blended FY18 portfolio gas price was in excess of its FY17 average realised gas price of $6.10/GJ. This reflects a blend of new gas supply agreements with Origin, with geographic pricing differentials, and existing Lattice legacy contracts.

 

We believe the sale will crystallise value for an asset that was likely undervalued within Origin. It should also reduce the Origin’s ongoing capital expenditure requirements so more focus can be directed towards its remaining core operations of gas and electricity retailing, as well as unconventional gas through Asia Pacific LNG.

 

Following this announcement, we lowered our target price to $8.25 from $8.30, in line with our discounted cash flow valuation which is based on a post-tax weighted average cost of capital of 8.94%. We maintain our Accumulate recommendation.

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