Should you add Origin and AGL to your portfolio in 2014?

If 2013 was any guide for consumers it would appear that electricity, gas and water prices are firmly on the rise. While competition has meant that savvy consumers can shop around and possibly lower their bills, the general apathy and perceived switching costs mean many consumers never take advantage of lower competing offers.

While the situation described above would be the view of many consumers it’s interesting to note that 2013 was also a year in which major energy retailers complained of a tough retail environment containing heightened competition, due in part to the deregulation of markets which has made it easier for competitors to enter the energy retailing market.

While all consumers are affected by rising utility costs, savvy consumers enjoy the benefits of increased competition. However, shareholders in utility companies have been directly affected by the competitive pressures in 2013. Australia’s two major electricity and gas retailers Origin Energy (ASX: ORG) and AGL Energy (ASX: AGK), both experienced headwinds within their respective divisions. While AGL managed to still report growth in its retail operations, Origin reported reduced earnings within its Energy Markets division.

But what does 2014 have in store?

The good news for shareholders is that in 2014, Origin and AGL may both manage to claw back margin within their retail operations.

AGL’s shareholders will benefit from the October 2013 takeover of retailer Australian Power & Gas, which added approximately 353,000 accounts to its customer base and will boost its economies of scale. Meanwhile Origin may have felt the cost pressures in financial-year (FY) 2013. It suggested in its full-year results presentation that around $100 million in gross profit had been affected by retail price controls in FY 2013. Pleasingly for shareholders in FY 2014, an increase in the allowance for wholesale energy and retail costs should see the firm claw back around $80 million.

Foolish takeaway

The energy retail operations of both Origin and AGL should show improvement in 2014, however it is the long-term outlook and major projects that are particularly exciting. Origin and AGL, as well as fellow energy producers Oil Search (ASX: OSH) and Santos (ASX: STO), have major projects which will be completed in the near future and these projects are expected to provide a major boost to the companies earnings.

A major boost to earnings should provide a substantial boost to dividends!

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Motley Fool contributor Tim McArthur owns shares in Origin Energy.

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