Australia | Aug 02 2021
This story features ORIGIN ENERGY LIMITED. For more info SHARE ANALYSIS: ORG
Another downgrade to FY22 guidance from Origin Energy has signalled continued pressure on the balance sheet, only likely to be mitigated by the distribution from APLNG
-APLNG distribution the main positive derived from the update
-Higher fuel costs affecting Origin Energy to a greater extent than previously envisaged
-Substantial deferred tax liabilities now back on balance sheet
By Eva Brocklehurst
Higher input costs have driven Origin Energy ((ORG)) to make another downgrade to earnings expectations, although there is some light at the end of the tunnel for FY23. The latest announcement bookends a series of weak full-year results, Ord Minnett asserts, although FY22 appears to be setting the low point.
On the basis of the guidance, FY22 operating earnings (EBITDA) appear likely to decline -36-56%, despite electricity forward prices increasing materially. Credit Suisse believes the downgrade cycle in energy markets will be complete if consensus converges on the company's FY23 guidance range, although maintains its forecasts at the lower end.
Along with the June quarter report, FY22 and FY23 energy markets guidance was provided for the first time and FY22 EBITDA is guided at $450-600m, while FY23 is $600-850m.
Goldman Sachs asserts FY22 was always going to be a trough year for energy markets but the guidance was worse than expected. Still, while margins will be squeezed in FY22, a recovery should subsequently occur.
The one positive brokers took from the update was the APLNG joint venture, which continues to outperform. APLNG production in the June quarter was 173PJ taking it to 701PJ for the year. The distribution to Origin Energy is $709m for FY21, roughly in line with expectations yet, as Macquarie points out, this is where the positive aspects of the announcement finished.
Nevertheless, Morgans believes the downgrade to energy markets is more than offset by the higher assumed prices received by APLNG in the short term and lifts its oil price assumptions, resulting in an upgrade to integrated gas earnings estimates.
The broker concedes there is little opportunity for energy market earnings to lift in FY22, as retail prices and wholesale purchase costs have largely been set. Some recovery is assumed in FY23 as higher spot prices and volatility flow through to higher customer pricing. All up, Morgans believes the combination of electricity and LNG exposure is not adequately valued by the market.
The majority of the decrease to FY22 earnings forecasts is the unexpected rise in the coal cost for the Eraring power station. Origin Energy is now expecting higher prices for spot coal purchases and will have to take on larger volumes because of a drawdown in stockpiles in the June quarter.
Credit Suisse understands this was a result of running Eraring harder to protect a short position in relation to surging spot electricity prices. Still, with trough earnings, underperformance against the ASX200 and firming Brent oil, along with good free cash flow, there is enough evidence in the report to justify an upgrade to Outperform from Neutral for the broker
Ord Minnett had been quietly optimistic ahead of the update, given the recent strength in commodity prices, but did not anticipate Origin Energy would be affected by higher fuel costs to this extent. It's a challenge to be positive and the broker goes the other way to Credit Suisse, downgrading to Hold from Buy.
Credit Suisse expects utilities markets will be difficult but, as FY22 represents the trough, the positives should ill take over, including migration to the Kraken platform, the commercial development of Beetaloo and the de-risking that comes with repairs to the balance sheet.
Morgans, too, considers success in the Beetaloo could provide a modest uplift while Goldman Sachs agrees operating cost savings and the introduction of Kraken should mitigate some of the impacts of cost increases.
The focus is likely to remain on the weak energy markets guidance yet Ord Minnett acknowledges, as a marginal positive, the balance sheet appears sustainable. The broker does does not envisage any increases in dividends despite a sizeable distribution from APLNG.
The company has indicated deferred tax liabilities of around $670m have been brought back on the balance sheet and while this is non-cash now it will be cash tomorrow, Macquarie asserts, albeit with the franking credit.
Cash generation from APLNG should help the company meet its 2-3x net debt/EBITDA target yet Macquarie still believes leverage is still too high and debt reduction is likely to be required. Subsequently, with earnings re-based, there is a path to growth, the broker adds.
The liability stems from stronger commodity prices that are causing the APLNG joint venture to repay tax effective shareholder loans faster than initially expected, Morgans points out. The main issue for investors, in the broker's view therefore, is that with debt reduction being necessary, paying tax at the Origin Energy level will slow the returns process.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, maintains a Buy rating with a $6.10 target and the database has four Buy ratings and three Hold. The consensus target is $4.94, suggesting 16.7% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.4% and 4.5%, respectively.
See also, Origin Draws The Short Straw On Gas on April 21, 2021.
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