Origin’s Outlook Mired By Weak Pricing

This story features ORIGIN ENERGY LIMITED. For more info SHARE ANALYSIS: ORG

-Weak ramp gas prices
-But APLNG still on track
-Is gearing too high?
 

By Eva Brocklehurst

The complex process of starting up the large APLNG project continues unabated and remains central to broker analysis of Origin Energy ((ORG)). First cargo is expected in the fourth quarter of 2015.

While a slight slippage from a mid 2015 target has occurred, the scale of the project means any delay in revenue is very relevant to estimates for FY16-17, notes Credit Suisse. The most vexing question for the broker is how long it will take for APLNG to achieve full commercial volumes. This uncertainty is key to much of the variation in broker expectations.

Regardless of what the oil price is doing or any delays in hitting contracted volumes, Credit Suisse believes a strategy for Origin's future will require more equity. While the stock is not hugely overvalued on a base case, the risks to equity are too high in the current capital structure, in the broker's opinion.

Reserves were downgraded in the June quarter, which reflected issues such as a lower oil price generating tighter development programs, as well as some disappointing results at the BassGas project which will involve a $125m write down. Of most interest to Macquarie is the 6.0% downgrade to APLNG 3P and 3P plus 2C reserves, reflecting low permeability. This highlights further development work and possibly a broader industry risk, the broker maintains.

Macquarie acknowledges the stock's valuation is sensitive to a longer-term oil price assumption, exacerbated by leverage which is $4bn above what the broker considers is sustainable. Hence, while start-up of APLNG will be positive, Macquarie is more intent on witnessing some action on de-gearing, which could have significant impact on the share price.

The ramp up of APLNG will create significant confusion surrounding forecasts, Citi agrees, until it transitions to realised earnings. The impact may be non-cash but the broker considers it important for those brokers which set a target price based on earnings multiples. Citi continues to envisaged few near-term catalysts until APLNG delivers a step change in earnings in FY17. Hence, Citi retains a Neutral rating and has a $11.59 target.

There is no immediate cause for concern, in JP Morgan's view, as components of APLNG are now 97% complete. While revenue in the June quarter was down 23% as gas prices fell amid large volumes of ramp gas, this was partially offset by higher Australian dollar prices for oil and condensate. Deutsche Bank, too, found the production report broadly in line with expectations and notes, with no unsuccessful wells in the quarter, zero exploration expense can be assumed.

Revenue and production in the quarter may have been broadly in line but gas realisations were much weaker, because of an oversupply of ramp gas from APLNG amid delivery into a weak, albeit short-term, contract, Goldman Sachs maintains.

The broker reduces forecasts for APLNG exports for FY16 to reflect the risk of a slow ramp up but expects this is significantly offset by increased assumed capitalised interest. Goldman Sachs has a Sell rating and $10.06 target on the stock.

Sales revenue for gas under the QGC contract was also much worse than UBS modelled. The broker explains the weak ramp-up gas sales thus: the realised price, oil-linked under the contract, appears to be only around $1.10/GJ, reflecting a fixed cost capital adjustment as far as the broker understands. UBS had assumed it would be more like $5.50-6.00/GJ. If the oil price stays around current levels APLNG may receive around $200m for its initial 190PJ under this contract, rather than the $1bn modelled by UBS. This highlights just how big the impact can be at the prevailing quarterly oil price.

FNArena's database contains five Buy ratings. There are two Hold ratings and one Sell (Credit Suisse). The consensus target is $13.25, suggesting 18.4% upside to the last share price. Targets range from $10.70 (Credit Suisse) to $16.26 (UBS). The dividend yield on FY15 and FY16 forecasts is 4.5%.
 

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