Stock of the Day – Origin Energy (ORG) 


Origin Energy reported a disappointing fiscal 2014 result, with underlying net profit falling 6% toe AUD 713 million. Importantly liquefied natural gas or LNG production remains on budget and on track to start at Curtis Island in mid-2015. Short term earnings weakness was caused by a 25% decline in EBIT from the energy market division, which largely comprises electricity generation and retailing.


Sources of Origin Energy's east coast contracted gas  portfolio (Source – Company Reports)

Weak electricity sales were the main problem in part due to unusually warm weather but also due to retail electricity price inflation increasing use of residential solar panels and increased prevalence of energy efficient electrical appliances such as LED lighting. We expect the electricity business to benefit in future from retail price deregulation, more normal weather and an improving environment for generation and wholesale electricity prices.


ORG's electricity gross profit (Source – Company Reports)
 
Competition within the energy retailing sector is also likely to modestly lessen following the acquisition of Australian Power and Gas by AGL Energy earlier this year and the likely acquisition of Lumo by one of the majors. The industry has stopped the strategy of winning customers by door knocking thereby reducing competitive tensions and discounting.



ORG Daily Chart (Source – Thomson Reuters)

The reduction in political support for curbs on carbon dioxide emissions is positive for the generation sector with the carbon Tax repealed and the Renewable Energy Target or RET under review. It is also likely to reduce the rate of residential solar installations. The Origin share 3price responded well to the replacement of the planned AUD 1 billion equity issue announced with the Browse acquisition in June with a Hybrid issue. Origin has a further AUD 5 billion in undrawn comm1itted facilities and cash which should more than cover remaining capital expenditure for APLNG. We gave a BUY recommendation on the stock on 28/01/2014 at a price of $13.88. We put a HOLD recommendation on the stock at the current price.

NOTE - The following report was covered on 01/09/2014 under the Kalkine Daily section.

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