Origin Energy's reticence to provide FY23 guidance is understandable, but it belies the upside risk to Energy Markets. APLNG is still raining cash and the share price is rubber-necking at the winter electricity car crash.
ORG CEO Frank Calabria must have firmly bitten his tongue when he said: “Overall, I’m pleased with how the business navigated a myriad of challenges from high commodity prices and volatile wholesale energy prices; to fuel supply shortages and multiple weather events, while being able to deliver higher underlying profit and strong cash flow.”
Over at the almost forgotten APLNG, ORG’s cash distribution was a record $1,595 million. APLNG also supplied 150PJ to a desperate domestic market. This should not be overlooked by governments and policymakers before considering any sort of market intervention on pricing and supply. The APLNG selldown (10% = $1,957m) and the distributions received were the main elements of ORG’s very strong free cash flow in FY22 at $1,062 million (FY21 $1,030m).
The company did not announce any capital management on the back of this, other than the dividend, but has certainly gained some flexibility to do so.
Investment view
The good people in ORG’s guidance department (fictional, of course) must be tearing their hair out. Global energy events have conspired to toy with ORG’s Energy Markets guidance range as a cat with a mouse. Prior to Russia’s gate-crashing in Ukraine, and this was by no means the beginning of the world’s energy imbroglio, ORG’s Energy Markets FY22 EBITDA was expected to be $450-600 million.
Cue global discombobulation and throw in a domestic muddle of coal supply shortages, power station unit outages (4,000MW of coal generation was offline in June 2022) and political points scoring and the frazzled folk at ORG did not know if they were Arthur or Martha. The June downgrade to $310-460 million (Energy Markets EBITDA) evidenced the extremities of the possible outcomes to which the eventual dot point of $365 million was extruded.
Now, just as everything is looking more normal, the company has avoided providing guidance for FY23f and consensus has obliged by leaving its Energy Markets EBITDA forecasts unconvincingly low around $555 million.
We think the risks are now mostly on the upside now that coal supply is secured, and markets are functioning normally again. Coal prices are still going higher (BHP’s coal division earned more than copper in FY22) and it may be FY24f before it manifests in consumers’ power bills. The gas book only adds to the upside risk.
The silver lining was that the coal kerfuffle caused gas prices to ignite by 250% in Q422 and national electricity prices spiked by 190% compared to the same period last year. ORG’s gas book is a gem with over 100PJ of fixed cost supply positioning it perfectly against competitors caught the wrong way. ORG’s Integrated Gas underlying EBITDA increased 62% to $1,837 million in FY22, spurred on by those higher commodity prices and stable production.
Things have settled down a little with ORG locking in 4.4mt of coal supply, the majority of its FY23f requirements.
In our view, the chaos of the 2020 winter electricity market debacle has done ORG a disservice. The company is making genuine strides towards a transition to renewables including (potentially) bringing forward the closure of its Eraring coal-fired power station in the NSW Hunter Valley and investing meaningfully in renewable alternatives. ORG’s commendable corporate behaviour during the height of the silliness helped to ‘keep the lights on’.
Risks to investment view
If commodity prices fall and consumer demand for electricity and gas declines, ORG’s earnings would decline. Government intervention in energy markets would present a risk to earnings.
Recommendation
We have upgraded our recommendation to Buy from Hold.
