Origin Energy — a buy on weakness as investors focus on 2015

Origin Energy’s (ASX: ORG) Annual General Meeting this week had been keenly awaited by investors because in August when the company released its full year results it did not give specific guidance for financial year 2014, leading investors to anxiously awaiting the AGM for further details.

Unfortunately investors were again left with some uncertainty regarding the near-term earnings outlook for Origin.

Managing Direct Mr Grant King told shareholders that a number of improving trends which began towards the end of financial year (FY) 2013 have continued through into the current FY 2014. However despite certain improving trends, “the lagged effect of discounts introduced in FY 2013 will persist into FY 2014 and will delay earnings recovery in this current year.”

This delayed earnings recovery coupled with a warmer winter which has led to lower sales volumes is expected to reduce earnings at an EBITDA level in the Energy Markets division by around $30 million to $40 million in the first quarter, compared with management expectations. However exactly what the outlook for the full year is, remains somewhat unclear.

One of the important improving trends included improvements in customer acquisition and retention during the second half, which resulted in a net increase of 7,000 customers – compared with the loss of 23,000 customers during the first half and a loss of 160,000 customers during the prior year. The customer losses highlight the significant competitive pressures in the marketplace which Origin has had to deal with. Recently this has included AGL Energy’s (ASX: AGK) acquisition of Australian Power & Gas which has significantly boosted its customer numbers, allowing AGK to leverage its fixed costs over a wider customer base.

Other news also announced in conjunction with the AGM was the extension of Mr King’s contract. Mr King — who has held the position of Managing Director since Origin was spun-out of building supplies company Boral (ASX: BLD) in 2000 — had a contract which was due to expire on the 30 June 2014. Mr King agreed to extend his service agreement to an “on-going” contract which can be terminated by either party on 12 months notice. It’s a good outcome for shareholders as a change in leadership while the critically important APLNG Project is still underway would be a less than desirable outcome.

Under the terms of the contract Mr King will receive a fixed remuneration of $2.5 million, a maximum short-term incentive worth 150% of his fixed remuneration and a maximum long-term incentive worth up to 120% of his fixed remuneration.

Foolish takeaway

The outgoing Chairman pointed out during his address that since listing in 2000, Origin has provided total shareholder returns on a compound basis of 22%, which is nothing short of outstanding.

Acknowledging  these outstanding long-term returns and considering Mr King’s guidance that despite the current difficult trading environment he expects “to see strong growth in earnings and cash flow in the period FY 2015 to FY 2017” any weakness in Origin’s share price could be considered as a buying opportunity by long-term investors.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy.

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