Still under pressure from low oil prices and a heavy debt load, gas producer and energy retailer Origin Energy Limited (ASX: ORG) announced this morning that it would spin off its upstream gas business into an Initial Public Offer (IPO) – to create a new company – in 2017.
As Origin lacks the capital to invest into these largely untapped assets, an IPO is thought to be the best decision for all involved. Origin can use the proceeds of the sale to close out some contracts and shore up its balance sheet, while the new company ('NewCo') will benefit from dedicated management and easier access to capital.
NewCo will end up with many of Origin's prime prospects, including Origin's share in the Waitsia, Otway, and BassGas fields plus a number of other projects. After completion of the IPO, NewCo is expected to have around 948 PetaJoules (PJe) in 2P reserves as well as around 75 PJe in annual production.
Contracts will ensure NewCo's earnings in the short term, and the sale is expected to grow Origin's Earnings Per Share from 2019 as well as improve its return on invested capital. Origin will retain its share of its mega APLNG project as well as the Ironbark, Browse, and Betaloo basins.
The proposed IPO will not require shareholder approval, but Origin did not state how it would account for the interests of shareholders – perhaps by offering them shares in NewCo first. Here's hoping that Origin conducts the IPO in a way that is fair for all existing shareholders.
NewCo looks interesting, and at this point I would probably prefer to own it instead of Origin. Without the IPO documents, there's no point making an investment decision yet – but you can expect detailed coverage from us when the documents come out next year.
