Have investors been too bullish on Origin Energy Limited?

There is a lot to like about Origin but it could already be fully reflected in the share price.

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Origin Energy Limited’s (ASX: ORG) shares are down around 2% at lunchtime today, after the company failed to provide investors with specific full-year earnings guidance and highlighted that despite some moderating in price discounting, the competition would continuing to weigh on the company’s Energy Markets division.

Overall the interim results were reasonable: underlying profit increased 5% to $381 million, underlying earnings per share grew 4% to 34.6 cents per share and an unfranked interim dividend of 25 cents per share (cps) was declared.

However despite this reasonably solid performance, the question remains whether investors and analysts have been too bullish in their forecasts for earnings in financial year (FY) 2014?

Breaking the results down by division we see that the Energy Markets underlying earnings before interest, tax, depreciation and amortisation (EBITDA) plunged 23% due to a multitude of factors including competitive price discounting, a warm winter which reduced sales volumes, prior year customer losses and higher solar PV usage. The Exploration and Production division enjoyed a 57% increase in EBITDA thanks to higher commodity prices and higher production volumes. The LNG division boosted EBITDA by 30% thanks to higher domestic gas sales and production, while the NZ-based Contact Energy benefitted from favourable exchange rates which helped contribute to a 17% increase in EBITDA.

Given that Energy Markets are such a significant contributor to group profits, it is concerning to see such a hefty decline in EBITDA. Management stated that there is a downward underlying trend in energy consumption. Improvements in this division appear to rely upon household growth to counter this consumption decline plus a moderating of the intense discounting and competition.

Foolish takeaway

Many investors’ eyes remain on the ‘prize’ which is the APLNG Project, which pleasingly remains on schedule with 58% of the Upstream component and 62% of the Downstream component complete. This will indeed be a game changer in terms of revenues and earnings for Origin but it doesn’t mean that the rest of its business units can be ignored.

Analyst consensus forecasts for full-year earnings per share are currently 69.4 cps according to Morningstar. The lack of guidance from Origin’s management and the potential for further deterioration in the Energy Markets division could mean that Origin is at risk of having near-term earnings forecasts revised down.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy Ltd.

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