It has been a slow burn for Origin Energy to finally reach a position where everything is going right for it. Global energy markets are underpinning strong earnings growth for energy businesses such as ORG.
With 7 spot cargoes sold during 3Q22, APLNG reported net revenue of $666 million. This was assisted by higher average realised LNG price of US$14.36/mmbtu. It is important to understand that ALPNG contracts have a 4-5 month lag, so better contract prices are on the way. ORG noted that another 4 spot cargoes will be reported in 4Q22. Considering all this, it is possible ALPNG could exceed its distribution guidance of more than A$1.1 billion.
In Energy Markets, strong electricity volumes were driven by a 16% lift in business volumes due to customer wins. Gas volumes were up 2% with strong sales to generation offsetting lower retail and business volumes.
ORG’s gas book within the Energy Markets business is not well understood by the market. There is an excess of political noise and pressure on domestic gas prices, but this is subservient to the relative prices to global benchmarks. Henry Hub gas prices at US$7/mmbtu and JKM prices at around US$25/mmbtu suggests that Australian domestic gas buyers have it pretty good, as they have done for the better part of 30 years. There is an increasing supply gap in the southern states making it fairly obvious that domestic gas prices must surely trend towards international prices.
ORG, with more than 100PJ of fixed cost gas supply, will get all the leverage of those (inevitably) higher gas prices. This could translate into higher earnings in the gas book of $400-500 million or more.
Investment view
ORG’s gas book and its ALPNG cash flow are sufficient reasons to own the stock on their own merit. But ORG now has more than 1 million customers migrated onto its Kraken platform that gives it a sizeable and enduring advantage in the cost to serve retail customers.
We think ORG is the best big cap play on rising East Cost gas prices with an excellent position in the retail energy market. Further, ORG is a low-risk oil price play. Clarity on the coal contract would be desirable.
ORG is expecting Energy Markets EBITDA to hit $600-850 million in FY23f as higher commodity prices pas through to customers. The company is heading for a free cashflow yield around 13% in FY23f, with net debt to EBITDA below its target range.
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.
