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Origin Rights Issue - Is it a great investment opportunity?

October 11, 2015 | Team Kalkine
Origin Rights Issue - Is it a great investment opportunity?



Efforts to boost balance sheet:

Origin Energy Ltd (ASX: ORG) reported its capital raising initiatives of $4.7 billion in last month to boost its balance sheet and sustain its credit ratings. Accordingly, the group announced a $2.5 billion of fully underwritten pro rata entitlement offer. ORG recently finished raising $1.35 billion of capital from institutions. The group made an offer for shareholders to subscribe for new shares for each seven present origin ordinary shares with the offer price of $4 per new share. Apart from this entitlement offer the group undertook several other initiatives to boost its balance sheet. Origin cut over $1 billion of capital expenditure and working capital for fiscal year of 2016 and 2017. Origin is reducing dividend payments to save $420 million of cash during the next two fiscal years. Origin is in the final stages to fund its APLNG project wherein the first train of the project would start production in next month while the second train production would start after six months.

The latest news revolves around High Peak Royalties Ltd (HPR) entering a participation agreement with Mosman Oil and Gas for HPR to acquire 30% and Mosman to acquire 70% of onshore NZ producing oil and gas assets from ORG for about NZ$10m. This is a step from ORG’s side to focus on the LNG export project.


Origin Energy’s capital raising efforts in the coming years (Source: Company Reports)

Contact energy impairment charges mainly contributed to the bottom line pressure:

Origin Energy reported a statutory loss of $658 million in fiscal year of 2015 due to the impairment charges incurred on the back of the group’s investment in Contact Energy and upstream assets coupled with effect of depreciation of the Australian dollar on the fair value of financial instruments and debt. Contact Energy was reported as discontinued operation and added $199 million to the Statutory Loss. Origin divested its share of 53.09% interest in Contact Energy and got net cash proceeds of over $1.4 billion and NZ $200 million. ORG delivered a 4% yoy decline of underlying profit to $682 million during the period. On the other hand, ORG’s underlying EBITDA improved by $10 million to $2.15 billion, driven by enhanced energy markets performance. Origin has a solid dividend policy and paid more than 50 cents per share, on an annual basis, which is at least 60 % payout ratio of Underlying Profit. Management declared an unfranked final dividend of 25 cents per share leading to a total dividend of 50 cents per share for the fiscal year of 2015. Origin decreased its Operating Cash Flow after Tax by 23% yoy to $1.58 billion, impacted by rising working capital due to final carbon scheme payment, and the timing of tax instalments. Therefore, Origin changed its syndicated loan facilities to decrease the interest rate margin, and boosted facilities limit by $750 million to $7.4 billion.

 
Financial highlights in fiscal year of 2015 (Source: Company Reports)
 

Exploration developments:

Explorations by Origin and its joint ventures have been showing positive performance, indicating the group’s solid portfolio of assets and its capabilities of potential production. The drilling at Yolla-5 and Yolla-6 production wells in the Bass Basin occurred and accordingly Origin started production. Origin finished the Halladale-2 development well during final quarter of 2015 and suspended it for potential production. Two wells are suspended for future production in Speculant campaign out of total three wells (one exploration well and two appraisal wells including the Speculant-2 side track well). Senex reported that it (Origin joint venture partner at Cooper Basin unconventional gas exploration program) would be spudding its first well- Efficient-1 this month (four exploration wells are planned in FY16) to evaluate stratigraphic traps at the patchawarra formation within Allunga Trough in southern Cooper basin. Origin’s L1/L2 joint venture partner AWE reported that it started the Waitsia -1 well flow testing program which would further appraise the conventional Waitsia gas discovery at onshore Perth basin Western Australia. AWE management confirmed the production potential of conventional high cliff sandstone in the field. As per south Australian oil project highlights, (joint venture with Beach) five well program in greater limestone creek area had two appraisal wells and one near field exploration well. The fourth well in south Australian gas, Tirrawarra-86 is cased and suspended post the intersection of oil and gas play in target zones on track with estimates. With regards to the Queensland gas project highlights (joint venture with Beach), Whanto south west-1 well is on track with pre drill estimates and the well is cased and suspended.

 
Origin’s exploration and production permits and data (Source: Company Reports)
 

Stock Performance:

Origin’s Australia Pacific LNG would start selling its first share of gas production from its ATP620/648 fields to QGC during fiscal year of 2016. Moreover, Origin estimates that its Energy Markets would perform at par with its 2015 fiscal year, driven by rising natural gas sales to LNG projects. On the other hand, the better production from the Yolla-5 and Yolla-6 development wells at BassGas would offset reduced production from Otway and Kupe. The shares of Origin fell over 40% during this year to date, owed to the volatile oil prices and heavy impairment charges related to Contact. However, Origin stock has surged over 9.7% in just last five days, driven by its entitlement offer, and positive exploration results. Moreover, Origin is a solid dividend player with a yield of 7.69%. The share price dip has led to a trickier situation and the risk pertaining to crude oil volatility persists but supplementary cash on balance sheet and reaffirmation of credit rating by Standard & Poor along with expectations of higher prices around the end of the year or around early New Year with commodity performing well will give some value. We remain bullish on Origin and reiterate our “BUY” recommendation on the stock at the current price of $6.5.


ORG Daily Chart (Source: Thomson Reuters)

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