Should you buy AGL Energy Ltd or Origin Energy Limited?

With both companies releasing their interim results, now is a good opportunity to compare the two.

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It’s almost as assured as death and taxes that humans will continue to require energy to live comfortable lives. While the source and delivery of that energy may very well change, the requirement will remain.

Two of Australia’s leading, vertically integrated energy companies are AGL Energy Ltd (ASX: AGK) and Origin Energy Limited (ASX: ORG) and both just released their half-yearly earnings results.

AGL reported a decline of 2.6% in revenue to $4.84 billion and an 11.4% drop in underlying earnings to $242 million. The interim dividend was maintained at 30 cents per share (cps). Management singled out the warm winter and a drop in customer demand for energy as affecting the firm’s results.

On the positive side the acquisition of APG’s customer base, an expected step up in Queensland gas sales next year, reduced customer churn, reduced discounting and (subject to ACCC approval) the recent purchase of Macquarie Generation should all create positive momentum going forward.

This momentum, particularly the benefit of a full six months contribution from APG, has led management to forecast a stronger second half and provide guidance for underlying profit of between $560 million and $610 million for the full year.

In comparison Origin produced a 5% increase in underlying profit with the Exploration and Production division the standout thanks to higher production volumes. Management also cited improvements in customer retention and lower levels of discounting in NSW as important contributors to the overall result.

Importantly the company has continued to progress its APLNG Project which is on schedule to enter production in mid-2015. The board declared an interim dividend of 25 cps – in line with the previous year, although unfranked.

Of concern, Origin’s management didn’t provide investors with their view on full-year result expectations.

Foolish takeaway

Over the past 12 months Origin’s share price has rallied 25.6% higher; an impressive outperformance compared with the 7.8% return from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). Meanwhile, disappointingly for shareholders, AGL’s share price is up just 3.8%.

Despite the outperformance of Origin there are a number of reasons for investors to be more positive on the outlook for Origin’s share price than AGL’s. Firstly, it trades at a price closer to its book value (BV). Given replacement value of both these asset based businesses is almost surely above stated BV, buying at a lower metric is appealing. Secondly, the APLNG Project has the potential to add to Origin’s future earnings, making its outlook significantly more appealing than AGL’s.

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

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