Across client accounts that have selected the “Income” Australian Equity option, we have bought Origin Energy (ORG), a vertically integrated energy company with operations including oil & gas exploration and production, power generation and retailing. This purchase has been funded from the sale of AGL.
We are positive on the medium-term outlook for ORG for the following reasons:
- ORG owns 37.5% of APLNG, a global low-cost, long life LNG producer backed by long term contracts. Due to its position on the cost curve, it should be cash profitable throughout the economic cycle.
- ORG also has a portfolio of strategically attractive electricity generation assets, which includes a mix of gas, modern coal and renewables. Not only does this provide generation flexibility depending on demand, but it also enables the company to divert gas between the spot gas and electricity markets to maximise value.
- ORG has restored the strength of its balance sheet with gearing heading to the bottom of management’s target range. This combined with increased cash distributions from APLNG provides scope for a more progressive dividend policy from next financial year and may lead to other capital management initiatives in the medium term;
- The LNG market is currently undersupplied from 2023-2025. During this period, prices are likely to increase significantly.
As with all investments it is not without risks which include being exposed to declining energy demand due to increased energy efficiency initiatives and changes in industry regulation. With its interest in APLNG there is the risk to dividends and debt reduction if oil prices fall significantly for an extended period.
As AGL has a similar business with the generation and sale of energy, it is exposed to similar risks that ORG. However, it lacks the level of vertical integration which ORG enjoys, and given the increasing cash distributions from APLNG we see more potential upside for both income and capital appreciation from ORG.