Origin Energy says retail prices must go up

Fresh from reporting a 21% drop in underlying earnings before interest and tax to $1.038 billion in the Energy Markets division, Origin Energy’s (ASX: ORG) CEO Mr Grant King has been reported in the Australian Financial Review as claiming that the electricity price war is unsustainable.

The price war was largely to blame for the division’s $279 million drop in earnings and has led Mr King to forecast that the industry would have to reduce cut-price power offers in the future. As Mr King stated, “Discounting cost us a lot of money this year and that’s to the customers benefit”. His comments are no doubt welcome news for shareholders, however, they’re not such good news for customers.

Having come through a tough 12-month period, things are looking up for Origin. Queensland and South Australia have now both moved to unregulated retail pricing which leaves NSW as the only remaining regulated state. The huge Australia Pacific LNG project is also tracking to plan. The project is now 45% complete and funding for the project looks pretty well assured without any need for a capital raising.

Foolish takeaway

Origin’s share price has underperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past year, gaining just 4% compared with the index, which is up over 17%. Much of this underperformance relates to the company being forced to downgrade guidance twice during the 2013 financial year and the market becoming concerned about funding arrangements. With funding shored up and the outlook for Origin brighter, this is one blue-chip stock that may currently find itself mispriced.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy.

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