Origin Energy Limited (ASX: ORG) is a core holding for many investors given the company provides exposure to the important oil and gas sector but at the same time offers diversification into the energy sector too. Despite a tough year in financial year (FY) 2013, which saw underlying profits fall 15% from $893 million to $760 million, investors appeared to quickly put the past behind them and focus on the future. That focus saw Origin’s share price put on 11% since the release of its full year results in August. In comparison the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up just 3.5% over the same period.
There are at least three factors which could be enticing investors into the stock.
1) Earnings Growth
According to research by Morningstar, Origin is set to increase its earnings from 69.2 cents per share (cps) in FY 2013 to 69.6 cps in FY 2014 to 86.3 cps in FY 2015. The forecast jump in earnings in FY 2015 is impressive; as FY 2015 approaches and investors become more confident that the forecast will be met, the potential for further share price re-rating increases.
2) Asia Pacific LNG production approaching
It’s been years in the making and literally billions of dollars in development, however 2014 will mark the final stages of APLNG development, with production scheduled to begin in mid-2015. Origin holds a 37.5% shareholding in the APLNG project and the earnings flowing from this shareholding are expected to be a major contributor to the company’s future earnings.
Some businesses suffer from the problem of potentially becoming obsolete. This is particularly problematic amongst businesses which sell goods and services that can come in and out of fashion. Likewise technology and biotechnology companies also risk obsolescence.
In contrast, consumer demand for energy is unlikely to alter dramatically with the most likely path being a steady increase in long-term energy demand per capita. Origin has built an impressive portfolio of strategic assets and also – like peer AGL Energy Ltd (ASX: AGK) – it has significant retail energy market share.
The combination of a catalyst for earnings growth in the form of APLNG, the overall quality and defensive nature of this blue chip company and the potential for future earnings growth to be followed by dividend growth make Origin a company worth investors keeping an eye on in 2014.
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Motley Fool contributor Tim McArthur owns shares in Origin Energy.
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