Shareholders in diversified energy producer and retailer Origin Energy Limited (ASX: ORG) could be forgiven for shaking their heads in disbelief and wondering aloud – 'What is going on?!' Despite a lot of positive commentary surrounding the LNG industry in general and the production boost the Australia Pacific LNG Project will have on Origin's cash flows in particular, shareholders have enjoyed very limited share price appreciation.
In fact, since the start of 2014, Origin's share price has gained just 4.7%. While over a five-year time frame the weak performance of Origin's shares is even starker – the stock price is up just 2.7%, compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) which has gained 40.2%! Even AGL Energy Ltd (ASX: AGK) has done better; AGL's shares are 11% higher over the last five years.
For investors the question remains to be answered – if the APLNG Project does create a step change in Origin's earnings base, then is the market underestimating the company's value?
The 'Yes' case
As the middle class in Asia rises, their demand for energy will grow. Asian nations will have to satisfy some of their increased energy demand through imports and LNG is seen as a likely candidate. Origin already has long-term LNG contracts in place for sales so it is protected from many of the 'No' case's arguments regarding LNG pricing pressure, and with completion of construction approaching, the increase in cash flows are near-at-hand.
The 'No' case
Recent headlines in the Australian Financial Review almost single-handedly sum up the negatives and possible misguided bullish expectations surrounding investor enthusiasm for LNG.
Here are a few of those headlines:
- Local LNG demand forecasts are 'crazy'
- LNG confidence is misplaced
- Natural gas risks losing out to coal in Asia: IEA
Is it in the price?
There would certainly appear to be question marks surrounding any future LNG projects, however thanks to long-term contracts Origin's APLNG should do fine. Whether all this future growth is already reflected in Origin's price is another matter – at least two major brokers think it is with Deutsche Bank and Credit Suisse recently maintaining hold and neutral recommendations respectively on the stock.
