Origin Energy’s announcement of the potential early closure of its large Eraring coal-fired power station sucked all the oxygen from the earnings result. The troubled Energy Markets division is coming right, APLNG is cooking, and ORG’s gas book is firing.
Notice has been submitted to the Australian Energy Market Operator of the potential early retirement of the Eraring power station at the end of the required 3½-year notice period (August 2025). CEO Frank Calabria said: “Australia’s energy market today is very different to the one when Eraring was first brought online in the early 1980s, and the reality is the economic of coal-fired power stations are being out under increasing, unsustainable pressure by cleaner and lower cost generation, including solar, wind and batteries.”
Australia’s media descended into a meltdown on the announcement, but the reality is that it will make ORG a far more attractive proposition. From an earnings perspective, the closure will cost the company almost nothing. From an ESG perspective, both from a retail customer and equity market point of view, the news is unashamedly positive. With plenty of investors circling the Australian energy markets, ORG without Eraring becomes a much more attractive idea.
As for the result itself, Energy Markets EBITDA of $268 million was a cocktail of bad electricity gross profit offset by a very strong gas gross profit. The electricity result was impacted by a variety of factors and included supply constraints from a coal supplier which is expected to persist through 2H22f. FY22f Energy Markets EBITDA guidance of $450-600 million was retained but the outcome will include a $130 million reduction in electricity expectation offset by a $125-175 million improvement in gas.
Group EBITDA guidance was increased to $1,950-2,250 on the back of higher oil prices benefitting APLNG. ORG expects a rebound of $150-200 million in underlying Energy Markets EBITDA in FY23f to $600-850 million as higher commodity prices flow through to customers. Integrated Gas and Corporate underlying FY22 EBITDA guidance was upgraded to $1,500-1,650 million.
We know that ORG received a $555 million cash distribution from APLNG but is now anticipating a full year distribution of more than $1.1 billion, net of oil hedging. ORG reduced its APLNG stake by 10% in the period to 27.5% and received net proceeds of $2 billion.
Investment view
ORG is a low risk exposure to rising oil prices with an improving Energy Markets business, although the latter is mainly driven by its low fixed price gas book and rising gas prices.
Risks to investment view
If commodity prices fall and consumer demand for electricity and gas declines, ORG’s earnings would decline.
Recommendation
We have retained our Buy recommendation.
