Origin Energy (ORG) - Headwinds blowing

Origin Energy is an integrated energy company engaged in the exploration and production of natural gas, electricity generation, wholesale and retail sale of electricity and gas, and sale of liquefied natural gas in Australia and internationally. Origin Energy was incorporated in 1946 and is based in Barangaroo, Australia.

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Origin Energy posted December-quarter LNG production and revenue that matched market expectations but was ahead of Ord Minnett’s forecasts, as was the average realised price for the quarter. The stronger realised pricing in the quarter was likely driven by sales into the spot LNG market, in our view, and raises a question over whether the performance can be repeated in coming quarters considering weak domestic gas demand. Volumes in Origin’s electricity and gas volumes in its energy markets division were weak, with retail volumes stable but business demand falling.

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Origin did not provide formal quantitative guidance on earnings from its UK Octopus Energy business but was at pains to emphasise the retail energy and software group’s seasonal bias to the second half of the year. We note prior FY26 guidance for Octopus operating earnings (EBITDA) of $0–150 million was not mentioned, leading us to view it as being at risk considering persistent problems with bad debts in the retail segment in the UK. Post the result, we have raised our FY26 EPS estimate by 4.1%, largely due to higher full-year LNG sales, while our FY27 and FY28 forecasts are cut by 5.2% and 6.0% as we incorporate increased depreciation and amortisation estimates and downgrade our expectations for Octopus.

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The rise in our FY26 EPS forecast leads us to increase our target price to $11.00 from $10.80, but we remain cautious on Origin given the headwinds we see – increased capital expenditure to maintain APLNG production, ongoing bad debt problems at Octopus, weaker wholesale electricity pricing, and a likely fall in spot LNG prices – and remain at Hold.