Company Overview - Origin Energy Ltd (Origin) is an integrated energy company. The Company has diverse operations: the energy supply chain, gas exploration and production, power generation and energy retailing. Origin operates several offshore exploration permits in Australia, New Zealand and the Pacific and has a portfolio of onshore gas producing facilities that process the gas for its customers to use. Origin is an energy retailer with more than 4.3 million customers. Its diverse product and service offerings include electricity, natural gas, LPG. It is also a provider of low-carbon products such as GreenPower, Green Gas and solar PV. Origin operates a power generation portfolio with 6,010 MW of capacity. Origin is the owners and developers of natural gas-fired power generation in Australia. It also produces power from other fuel sources, including black coal and renewable energy from wind farms. Origin has a diverse renewable interests in wind, geothermal, hydro and solar technologies.
Analysis - Origin Energy (ORG) recently reported an outstanding production of 36.9 petajoules equivalent (PJe) for the quarter ending 31 March 2015 indicating a 10% surge (i.e., 3.5 PJe) over the December 2014 quarter and 14% rise (i.e., 4.5 PJe) over prior corresponding period quarter in 2014. The production rise over the December 2014 quarter is attributed by the enhanced delivery from Australia Pacific LNG (APLNG) operated fields at Orana and Condabri (2.9 PJe) along with good customer nominations at Kupe (1.2 PJe). This of course was despite the pull down owing to the poor contribution from the Cooper Basin (-0.6 PJe).
Exploration and Production Updates (Source: Company Reports)
The Company further reported a sales revenue of about $198.4 million which indicates a drop of 16% in comparison to previous quarter given the soft commodity prices, poor sales of third party volumes and timing of product liftings. We also note that the APLNG CSG to LNG project is 91% through with the upstream project about 93% complete at the end of March quarter and the downstream project 89% complete. Other highlights included the drilling of 1069 development wells (although only 786 commissioned) and commissioning of seven gas processing trains. The Company has not specifically provided any quarterly exploration write-offs but reportedly spent $55m on exploration activities during the quarter without any unsuccessful wells.
Just before the latest updates, the Company reported that the APLNG Project (in which ORG has a stake of 37.5%) is expected to start the production by the middle of this year. APLNG project started the first gas turbine power generator out of the seven gas turbine power generators that are designed to power the Curtis Island LNG facility. Each gas turbine generator, is expected to deliver an output of over 15 megawatts (MW), and a combined output (for total seven gas turbine generators) of 105 MW. The project’s first gas will travel along its 530km pipeline from Queensland’s Surat Basin to the group’s LNG facility on Curtis Island. The Company reported to spend A$2billion since January 2015, till the project becomes self-funded. As of first half of 2015, ORG has a strong liquidity position, having $5.2 billion of committed and undrawn debt facilities, and believes that it has sufficient funds for remaining APLNG commitments.
Perth Basin (Source: Company Reports)
Then, a positive update on ORG’s Irwin-1 exploration well, which is situated in the onshore Perth Basin in Western Australia, has also been interesting. Primarily, the Irwin prospect spans EP320 and L1 boundary. The EP320 is a joint venture between ORG and AWE Limited with ORG having a stake of 67% and AWE Limited having 33% of interest. ORG and AWE have equal partnership for the L1 project. With regards to the Irwin-1 exploration well, it has been reported that the well was vertically drilled to a depth of 4,049 meters and is scheduled to test the gas potential in Senecio and Waitsia gas fields. The deeper Kingia, High Cliff Sandstones and the Carynginia Shale, the Irwin River Coal Measures witnessed gas shows in the secondary objectives.
Curtis Island Overview (Source: Company Reports)
Contact Energy in which ORG has a stake of 53.1% share, recently announced its March 2015 operational data, in which the average otahuhu wholesale electricity priceis $80/MWh and the average Benmore (South Island) electricity price is $79/MWh. The South Island hydro storage as of March 2015 ending was 65% of mean as compared to 80% of mean in the end of previous month, while North Island hydro storage was 83% of mean as compared to 91% of mean as compared to the previous month. As of 17 April 2015, South Island hydro storage was 64% of mean, while North Island hydro storage was 84% of mean.
Contact Energy’s March 2015 Production Summary (Source: Company Reports)
There has been a drag with regards to the finding that ORG has been fined $2 million by Australian Competition and Consumer Commission for its illegal sales practices. We need to see how the Company deals with such a malpractice in future. Moreover, S&P revised the Company’s long term senior unsecured credit rating to BBB- (stable) from BBB. However, there still have been some positive vibes specifically given the fact that Karen Moses, ORG’s Executive Director of Finance & Strategy has commented that this revision of the credit rating is not expected to have a material impact on the Company.
Growth Capital Expenditure by Segment and Cash Contribution to APLNG (Source: Company Reports)
At the same time, it is noted that the Company aims to continually conserve cash flow, accelerate cost reductions and ensure capital expenditure while carefully focusing on projects that will enhance cash flow and earnings in the near term. The effort with regards to persistently trying to decrease the capex spending and focus investments only on high returning projects for the coming years looks promising.
Origin Energy’s Significant Gas Position and Startup of APLNG to Drive Growth (Source: Company Reports)
The Company believes that 2015 and 2016 are its transitional years, wherein the energy market businesses will mature while LNG production is expected to start in Queensland. The impact of this transition is already seen during the first half of 2015, wherein the Company took advantage of available ramp gas in Queensland and used less gas from its own production to invest in production growth for 2016. As Yolla-5 and Yolla-6 development wells enter into production, BassGas is forecasted to return to full production growth in 2015. Otway Basin production is expected to increase by the development of Speculant and Halladale.
Origin Energy Daily Chart (Source - Thomson Reuters)
In fact, the March 2015 quarter updates illustrated potential commerciality of Senecio 3 appraisal well given that the production testing has been complete. Further, two new production wells at BassGas were reported to be spudded. Otway Basin was said to have reached total depth of 4,917m. ORG reported for completion of the Halladale-2 development well and spudding of Speculant-2 appraisal well in late April 2015. Yolla-5 production well at Bass Basin along with Yolla-6 were being batch drilled and are expected to help enhance production from Yolla field. Drilling of 99 wells at APLNG, 20 wells at Cooper Basin and one exploration well at Perth Basin constituted other activities for the March 2015 quarter. One would still need to consider risks related to APLNG delays and technical issues.
Overall, production from APLNG project, positive Irwin prospects and expanding sales from other projects, are the major growth drivers for the stock. Accordingly, we put a BUY recommendation for this stock at the current price of $13.21.
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