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Morningstar | Origin Is Tracking in Line at the Halfway Mark

Origin Energy represents the best value of the Australian utilities under coverage. It is higher risk than others in the sector considering its oil price exposure and relatively high debt levels. But if the oil price can stabilise around current levels of USD 60 per barrel, in line with Morningstar’s long-term forecast, or even move higher, then it should be able to narrow the valuation gap to peers. Its first-half trading update suggests the firm is tracking in line with guidance. We’ll adjust our earnings forecasts if necessary after the first-half result on Feb. 21. There is no change to Origin’s AUD 7.50 per share fair value estimate or no-moat rating. Currently, it trades at a 3% discount to fair value.

Integrated gas revenue is tracking slightly above our full-year forecast, nonetheless we remain comfortable with our forecasts following the sharp fall in the oil price in recent months. This will impact LNG contract prices with a few months lag. APLNG revenue in the December half rose 45% on the previous corresponding period, driven by higher oil-linked LNG prices. Revenue from domestic gas sales rose 36% as APLNG diverted more volumes to the domestic market, and the benefit of higher average realised prices as low priced legacy sales contracts represented a smaller proportion of sales in the half.

The energy markets business reported 4% lower electricity sales volumes in the first half on lower usage and customer numbers. The firm cited continued penetration of rooftop solar panels as a key driver of lower usage, which we view as a long-term headwind. Gas sales volumes increased 2%, as new short-term contracts helped sales to business customers increase 14%, offsetting a 4% reduction in retail sales and a 29% reduction in gas used for electricity generation. These results appear broadly in line with guidance provided in August 2018 for EBITDA in energy markets to fall 6% in fiscal 2019 because of competitive pressure.

The main negative in the energy markets division is the threat of government attacks to try to reduce utility bills, which are a major issue for households and businesses. This threat will likely stop the utilities capitalising on wholesale electricity price increases, which were traditionally passed through to retail customers. Going forward, retailers may have to accept lower margins to appease government and avoid further unfavourable measures. Should the Labor government take power in Canberra this year, as is likely based on betting odds, we would expect government attacks on utilities to increase.