Origin Energy Limited

ORG Details

Agreement Entered with APA Group: Origin Energy Limited (ASX: ORG) operates in three key segments: energy markets, integrated gas, and corporate. The energy market operations include energy retailing, power generation, and liquified petroleum gas (LPG) operations, mainly in Australia. As of 3 June 2021, the market capitalisation of ORG stood at ~$7.43 billion. On 10 May 2021, ORG announced a 60,483 shares rights issue (under the Matching Share Plan). These securities will rank equally in all respects with the already issued shares in the class. On 5 May 2021, APA Group (ASX: APA) declared that it has entered into a gas transportation agreement (GTA) on the East Coast Grid for three years initially. It will result in incremental revenue of $190 million for the first three years. The contract is extendable for two more years. APA will provide services on the Moomba Sydney Pipeline (MSP) and the South-West Queensland Pipeline (SWQP). The GTA with APA Group will begin from 1 January 2023.

Price Review Outcome: On 16 April 2021, ORG informed about its engagement with Beach Energy Limited (ASX: BPT) for a price review of gas purchased from the Otway Basin fields of BPT. The new price reviewed and set by the arbitrator will increase the supply cost in FY21 and FY22 of ORG in sync with an expected increase in volume. This increased pricing is binding from FY2021-FY2023 with limited rights to appeal. ORG will evaluate the timing and extent to mitigating the high cost of supply. Due to the price review outcome, subdued wholesale pricing and energy demand, and a lower than anticipated contribution from Octopus Energy, ORG has updated and lowered the FY21 guidance for Underlying EBITDA to $940-$1,020 million.

March Quarter Result Takeaways: The company reported 65.4 PJ of gas production in Q3FY21, down by 4% QoQ from its Australia Pacific LNG gas division. This decrease was due to the planned maintenance operations in the fields. Its Commodity revenue stood at $427.5 million from the integrated gas division in Q3FY21, up by 7% QoQ due to higher realised spot LNG and oil prices. However, the sales volume registered a dip of 6% QoQ due to the delay in cargos and lesser production in Q3FY21.

The energy markets division reported the electricity sales volume up by 5% QoQ in Q3FY21, to 8.4TWh. Its gas sales volumes during the quarter also recorded a 27% YoY reduction. ORG’s investments increased by 119% on QoQ to $104 million in Q3FY21. With robust operating and cost discipline, ORG has been able to reduce the FY21 distribution breakeven. ORG witnessed growth in customer accounts in Q3FY21, especially in Community Energy Services and natural gas. ORG’s investment in Octopus Energy is exhibiting a growth trajectory, increasing UK customers at more than 100,000 per month and expanding into new overseas markets (Japan).

Revenue & Net Income from 1HFY18-1HFY21; (Analysis by Kalkine Group)

Key Risks: The company faces COVID-19 pandemic and mild summer weather on its energy markets division, causing lower demand and wholesale pricing in the gas and electricity markets. 

Outlook: ORG estimates the Underlying EBITDA guidance within $940-$1,020 million and capex in the range of $400-440 million in FY21. It expects the FY21 cash distributions from Australian Pacific LNG (APLNG) to be greater than $650 million. ORG targets retail cost savings and is progressing well to achieve $100 million in savings by the close of FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of ORG gave a positive return of 12.28% in the past week and a positive return of 6.92% in the past month. The stock is currently trading lower than the 52-weeks’ average price level band of $3.870-$6.480. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount than its peer median, considering its lower gas production & revenue from APLNG and lower electricity & natural gas sales from the energy division in Q3FY21 on a pcp basis. For this purpose, we have taken peers like AGL Energy Limited (ASX: AGL), Beach Energy Limited (ASX: BPT), Central Petroleum Limited (ASX: CTP) and others. Considering the current trading levels, increase in commodity revenue and electricity sales volume in Q3FY21, targeted cost savings in FY21, expected cash distributions from APLNG in FY21, valuation, and associated risks of supply disruptions due to COVID-19 and increased supply costs due to the revised pricing on the BPT contract, we give a ‘Buy’ recommendation on the stock at the current market price of $4.480, up by 6.161% on 3 June 2021.

ORG Daily Technical Chart, Data Source: REFINITIV 

Karoon Energy Limited

KAR Details

Signed EPCI Contract & Taken FID on the Patola Project: Karoon Energy Limited (ASX: KAR) is involved in gas and oil exploration and mining activities. It has made investments in the exploration and evaluation of hydrocarbons in Australia, Peru, and Brazil. As of 3 June 2021, the market capitalisation of KAR stood at ~$705.89 million. On 3 June 2021, KAR inked an iEPCI^TM (integrated engineering, procurement, construction, and installation) agreement with TechnipFMC for the Patola project development in the Santos Basin in Brazil. The installation and delivery of the project equipment are scheduled for 2HCY22.

On the same date, KAR declared its final investment decision to advance with the Patola project development. After conducting a complete analysis and due diligence, KAR has decided with the advice of its independent financers and advisors. The Patola development budget is US$175– $195 million. The project is expected to produce more than 10K bopd initially, with the first oil production targeted for Q1CY23.

Received Dispute Notice for JV Agreement: On 26 May 2021, KAR announced that its branch office KEI Peru Z-38) Pty Limited, Sucursal del Peru (KEI Peru), has been notified of a dispute from Pitkin Petroleum Peru Z-38 SRL (Pitkin) about its joint operating contract for Block Z-38, offshore Peru. The notice states breach of obligations by KEI Peru to enter the fourth exploration phase of a licence (Z-38) agreement and undertake to drill a second well within the licence zone. Pitkin has offered to resolve the dispute via discussions. However, it has also mentioned starting a legal course to claim damages estimated over ~US100 million. The branch rejects Pitkin’s estimated claim and will proceed with defence in case Pitkin initiates the proceedings.

March Quarter (Q3FY21) Highlights: The company posted oil sales receipts of $97.2 million for Q3FY21, including receipts from the December cargo as well. Its first oil production from the Bauna field for the quarter stood at 1.14 million barrels (mmbbl). KAR shipped two oil cargos during Q3FY21 with 0.93 mmbbl sales realised at US$55.38/bbl. In addition, it incurred $27.2 million in association with the Baúna production costs.

Mr Scott Hosking will step down as the current CFO in 2HCY21, and KAR is advancing well in search of a new CFO. KAR reported steady receipts of $97.17 million from its customers during Q3FY21. It held a cash and cash equivalents balance of $173 million as of 31 March 2021. KAR is free from external debt on its balance sheet.

Revenue & Net Income from 1HFY19-1HFY21; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of rising COVID-19 cases in Brazil, Peru and operating within the safety protocols set for the mining operations. It is exposed to fluctuations in the production and prices of oil and gas.   

Outlook: KAR expects the oil production between 3-3.4 mmbbls for FY21. It estimates unit production costs between $US23-27/bbl and exploration and evaluation spend between US$7-8 million in FY21. KAR expects the Maersk Developer rig to arrive in Brazil in 1HCY21. It has planned a workover campaign at Baúna oil fields in 2QCY22 to be funded from its existing cash and expects the program to deliver materially to its production.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of KAR gave a positive return of 20.70% in the past three months and a positive return of 37% in the past six months. The stock is currently trading at its the 52-weeks’ high price of price 1.370. The stock of KAR has a support level of ~$1.260 and a resistance level of ~$1.478. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of high single-digit downside (in % terms). We believe that the company can trade at a slight discount than its peer average, considering the risk of a potential legal proceeding by Pitkin Peru and severe COVID-19 infection prevailing in Brazil and Peru. For this purpose, we have taken peers like Cooper Energy Limited (ASX: COE), Santos Limited (ASX: STO), New Hope Corporation Limited (ASX: NHC). Considering the current trading levels, decent returns in the past three months and the past six months, associated risks of increasing COVID-19 cases in Peru and Brazil, and potential legal case proceedings from Pitkin in Peru, we suggest investors recommend investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $1.370, up by 7.450% on 3 June 2021, owing to the news of Final Investment Decision taken on the Patola project.

KAR Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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