Integrated energy company Origin Energy (ASX: ORG) is not only Australia’s largest energy retailer, it can also boast of having significant power generation capacity. While for the financial year just ended the company reported a 15% fall in underlying profit to $760 million, there are many appealing attributes that make this firm one to consider for long-term investors.
1. Cost savings
Management expects to continue to reduce employee numbers, restructure businesses and undertake asset sales to reduce the cost base and improve cash flow. Potential asset sales include the sale of future non-core oil and condensate production, the sale of TAWN assets in New Zealand, the sale of gas metering and non-core land assets within the majority-owned Contact business.
Management has also announced the discontinuation of investment in Transform Solar and Geodynamics and is shift the firm’s legacy IT system to a new SAP-based customer system which should also help reduce ongoing operating costs in the future.
2. Capacity and reliability improvements
Origin has recently completed investments in a number of upstream assets which are set to improve reliability and increase production capacity. Amongst other benefits, the investment made in improving Origin’s upstream assets should allow the firm to increase supply into the growing east coast gas market.
3. APLNG project
From its beginnings in 2009 when Origin formed a joint venture with multinational giant ConocoPhillips (NYSE: COP), APLNG has steadily met its key milestones. Currently the project is on target to produce its first LNG by mid-2015 with both the upstream and the downstream projects 45% complete. With production fast approaching, the market is likely to become increasingly comfortable that the project will be completed on time and on budget and begin focussing on the soon-to-be-realised cash flows from the project.
4. Future growth
Given the long lead times involved with an integrated energy business, Origin must juggle a number of projects, studies and operations at one time. This includes looking to the future and thinking about medium-term growth projects to develop once APLNG is completed. Exciting development opportunities which may in the future turn into significant projects include further gas opportunities in the Otway Basin, a large-scale wind project at Stockyard Hill in Victoria and hydro and geothermal resource developments.
Management has already stated that although trends in energy markets are improving, earnings recovery in financial year 2014 are likely to be delayed. While this may act as a near-term drag on Origin’s share price, the longer term outlook makes this blue chip stock one for many investors’ watchlists.
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Motley Fool contributor Tim McArthur owns shares in Origin Energy.