Australia | Oct 27 2021
This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG
Origin Energy has timed the sell down of its stake in APLNG with high energy prices, freeing up cash for future opportunities
-Timing is right for the APLNG equity sale, wrapping up a seven-year de-leveraging effort
-Origin Energy maintains FY22 guidance for more than $1bn in distributions from APLNG
-Acquisition of batteries at Liddell and Mortlake can now be considered
By Eva Brocklehurst
Origin Energy ((ORG)) is working off its debt, selling a -10% stake in APLNG for $2.12bn to EIG. With no urgency to de-gear, Ord Minnett is among other brokers that believe the transaction is opportunistic because of the attractive price paid.
Credit Suisse agrees the timing was right, amid high energy prices, and comes as the company wraps up a seven-year de-leveraging effort. Debt peaked at $13bn in FY15 and led to the sale of the stake in Contact Energy and Lattice.
As a result of this transaction, gearing will reduce to 19% from 30% in FY22 and net debt to $2.3bn from $4.3bn. As part of the deal, Origin Energy will guarantee EIG obligations to satisfy any future cash calls made by APLNG with a counter indemnity provided by EIG.
The transaction is likely to be 3% accretive to value, Ord Minnett calculates, and on the remaining 27.5% stake there is a further 9% uplift to valuation. The broker also estimates pro forma gearing will fall to 18%.
Credit Suisse says the transaction implies a value for the entire 37.5% stake of $7.95bn, ahead of its valuation, too. This is dependent on the oil price, yet the broker retains its valuation formula for the residual 27.5%.
Morgans estimates the implied value of APLNG is $28.2bn or $15/mmboe of 2P reserves, and obtaining that valuation requires a long-term oil price of more than US$75/bbl.
The broker still envisages a disconnect between commodity prices and the price of oil and gas stocks, suggesting there is value to be realised when the market regains confidence in the sector, and in Origin Energy in particular given the strengthened balance sheet.
The sale will provide more flexibility to the balance sheet and allow Origin Energy to reduce its oil hedging. Macquarie calculates about -$80m per annum has been lost through hedging on average over the past five years.
Origin Energy has maintained FY22 guidance for more than $1bn in distributions from APLNG.
UBS recognises the sale removes some investor concerns regarding the constraints on the balance sheet even though the sale price was only an 11% improvement on its prior APLNG valuation. The company can now pursue growth or consider capital management.
The broker calculates Origin Energy should have ample capacity to pay distributions at the top end of its 30-50% range and assumes the board opts for a 40% payout-out of free cash flow while deploying capital to other investments, including batteries at key generation sites such as Eraring.
Origin Energy could spend more than $500m on a buyback and still be below the lower end of its 2-3x net debt/adjusted earnings (EBITDA) target.
On the other side of the coin, the sale reduces earnings from APLNG from FY23. FY23 interest savings of $50m do not offset the loss of the -$200m from the APLNG distribution yet Macquarie expects this will be improved by raising the pay-out ratio to the top end of the range.
Morgans increases the assumed cash flow paid by APLNG and scales this, given Origin Energy has a lower future share. The broker also notes the company stake in Octopus Energy has increased significantly in value.
Morgans points out the sale to EIG is interesting in that the company was reportedly backing Harbour Energy when it was courting Santos ((STO)) in 2018.
The broker does not believe the stake in APLNG indicates a takeover is being considered. APLNG is not publicly traded so there may be limited pressure to push Origin Energy's share price to the benchmark that the acquisition implies.
The acquisition of batteries at Liddell and Mortlake or funding expansion of Shoalhaven can all be considered, in Macquarie's view, and given the company's measure of net debt/earnings estimates, the company has $1.0-1.7bn in capacity.
FY23 electricity futures are consolidating above guidance, although coal remains the risk and confirmation on the coal-price trajectory is required before upside can be assumed, Credit Suisse asserts.
FNArena's database has four Buy ratings and two Hold. The consensus target is $5.64, signalling 5.8% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.0% and 4.8%, respectively.
See also, Soggy Outlook From Origin Energy on August 2, 2021.
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