Origin Energy Ltd (ASX: ORG) has seen its share price rise by 17% in 2016.
This is ahead of resources sector peers BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). They are up by 14% and 13% respectively. Here are three reasons why Origin has stormed ahead this year.
Strategy
Origin's strategy has centred on reducing its cost base in a period of lower oil prices. In financial year 2016 Origin expects to reduce operating costs in the Energy Markets business by $65 million and capital costs by $50 million. Further, it has introduced a new programme to deliver more cost reductions across the business. They could amount to as much as $200 million per annum on a sustainable basis by the 2017 financial year.
Origin's strategy has also focused on improving customer loyalty. It has sought to enhance the customer experience by making it easier and simpler for customers to engage with Origin. For example, it has extended call centre hours, rolled out its digital platform and simplified the billing process.
In tandem, Origin has confirmed its intention to become the dominant player in the solar industry as measured by installed capacity. Its Solar As A Service offering allows customers to access the benefits of solar without the need to buy the system. By making its product offering more relevant, Origin's customer loyalty and margins could rise.
Financial improvements
Origin's financial standing has improved significantly in recent months. For example, it has put in place cash preservation measures to reduce net debt to below $9 billion in financial year 2017. This has been aided by restructuring, the discontinuation of geothermal activities and the deferral of expensive IT projects. Allied to a fall in debt is $6.8 billion in committed undrawn debt facilities and cash, which provides Origin with additional financial flexibility during the lower oil price period.
Asset disposals have also strengthened Origin's balance sheet. The sale of Mortlake Terminal Station for $110 million forms part of an ambitious asset disposal programme. Origin expects to record asset sales of over $800 million and this should reduce its overall risk profile while streamlining the business.
Rising oil price
Origin's 17% gains are not due solely to internal factors. After it reached a low of US$27 per barrel in January, the price of Brent oil has surged higher. It stands at US$43 per barrel and is forecast to rise to US$78 per barrel by some analysts within two years, although there can be no guarantee that this will take place.
A higher oil price is good news for Origin since it is a price taker. Although it has made progress on its financial standing and strategy in recent months, it remains highly dependent upon the price of oil. Therefore, its risk/reward profile lacks appeal due to the highly uncertain outlook for oil.
