Just as Origin seemed set to deliver a group-wide improvement in earnings, a domestic coal shortage and higher coal prices have ripped the gear box out of ORG’s wagon. Such is the uncertainty pervading local and global energy markets that the company has withdrawn its FY23 guidance. We grudgingly lower our recommendation to Hold.
Under-delivery of contracted coal supply has created a domino effect on ORG’s Energy Market operations. The material under-delivery of coal from Centennial Coal to ORG’s Eraring coal-fired power station in NSW has been impacting the generator throughout FY22.
The situation is deteriorating resulting in lower output from the plant. ORG has had to find alternative sources of coal supply at significantly higher prices. The lower output from Eraring has meant ORG has had to purchase electricity at current high spot prices to ensure it can supply its customers.
The knock-on effect has impacted ORG’s Energy Markets earnings. Underlying EBITDA in FY22 is now expected to be $310-460 million (a very wide range reflecting the uncertainty) compared to previous guidance of $450-600 million. Increases in wholesale electricity prices in Australia had far outstripped ORG’s ability to recover these through price increases to its customers.
The situation is very likely to persist into 1H23f creating further uncertainty on Eraring’s output in FY23f. ORG is only part-way through finalising coal contracts for FY23f.
Even with high gas prices benefiting the company due to its fixed price gas book, the electricity market is in such a state of flux that earnings guidance for FY23f was withdrawn.
Consensus forecasts have been lowered but there will be low confidence in the numbers.
Fortuitously, ORG’s APLNG stake continues to add value. Rising LNG prices will drive earnings higher. APLNG could exceed its distribution guidance of $1.1 billion this year.
Investment view
ORG has been caught in the maelstrom of domestic disfunction and global commodity price uncertainty. The sharp share price reaction to the earnings guidance downgrade looks to be overdone, but we acknowledge that the uncertainty factor has risen drastically. Political intermediation is a possibility and yet this may not resolve
the underlying issues.
We still see good value in ORG, but this is now further down the track, hence our modified recommendation to Hold.
Risks to investment view
If commodity prices fall and consumer demand for electricity and gas declines, ORG’s earnings would decline.
Recommendation
We have lowered our recommendation to Hold from Buy.
