Origin Energy’s woes in Energy Markets are as persistent as ever and are detracting from the strong cash flows from APLNG. The company can see the beacon on the hill for Energy Markets but the share price says otherwise.
ORG’s FY21 result delivered underlying net profit of $318 million with free cash flow at $1.14 billion due mostly to the outsized $709 million distribution from APLNG and lower capex. It allowed debt to be reduced by $519 million taking net debt down to about $4.6 billion. The Board declared an unfranked final dividend of 7.5cps taking the full year dividend to 20cps.
FY21 Energy Markets EBITDA of $991 million was in line with consensus. The company reiterated its recent guidance of $450-600 million EBITDA for Energy Markets and it also provided group consolidated EBITDA guidance of $1,850-2,150 million.
At APLNG, capex and opex guidance is approximately 10% higher than FY21 at $2.1-2.3 billion although this is not a big concern given some maintenance and a bit more exploration activity.
APLNG continues to impress having shipped 130 cargoes for the year and improved its reserves replacement ratio to above 100% in operated acreage. This is a great outcome and indicative of how far this project has come.
The headwinds in Energy Markets will just not go away with low wholesale electricity prices compounded by COVID-19 impacts across key commodities of electricity, gas and oil. The market is sceptical that ORG can lift the performance of this division to the $600-850 million range ORG sees for FY23f from the midpoint of guidance which is already down $245 million from the start of the year. A catalyst is not evident to halt the negative momentum. Commodity price behaviour will be just as important in how this plays out. The balance sheet is disproportionately dependent on oil at the moment.
Of the factors it can control, ORG is still aiming to take $100-150 million in retail cost savings by FY24f along with continued capital discipline. Capex is expected to be between 370-410 million.
Investment view
APLNG is the asset that keeps the sanity in the share price given its dependable performance and runaway cash flow. If only the Energy Markets could get its act together, it would be off to the races with this stock. So investors need to see this as a glass half full situation but can be forgiven for taking the opposite view until Energy Markets earnings gets up off the floor. Management can only point to the recent improvement in commodity prices to give credence to the guidance figures but the fish are not biting.
There may come a time when ORG looks at its business in a different way, perhaps in some form that might help to realise the full value of APLNG. That is only speculation for now, but it is a well-worn pathway.
Back in the real world, we have maintained our Hold recommendation given the on-going earnings risk in Energy Markets.
