Kick Off: Origin Energy Limited v Oil Search Limited

Two energy companies with big LNG projects and great earnings expectations face off.

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In the next game for the oil and gas group, the two rivals Origin Energy Limited (ASX: ORG) and Oil Search Limited (ASX: OSH) both have one loss each and really need to win big in this final group match. The Motley Fool’s ASX World Cup has already seen Woodside Petroleum Limited (ASX: WPL) take a strong lead, with Santos Ltd (ASX: STO) following in second.

Here’s how they line up

Measure Origin Energy Limited (ASX: ORG) Oil Search Limited (ASX: OSH)
Market Cap $16.1 billion $14.7 billion
Return on Equity 5.70% 6.00%
Price to Book 1.21 3.4
Dividend Yield 3.40% 0.50%
Price/ Earnings Ratio 21.6 34.5
PEG ratio 2.69 0.34

Source: Morningstar

The table above shows Origin has advantages in most of the measures except for a slightly lower return on equity and a higher Price/Earnings-Growth (PEG) ratio. Origin may have a higher dividend yield and a lower P/E ratio, but with Oil Search’s much higher P/E, it may have something special to show off.

Origin Energy

The integrated energy company gets the great majority of its revenue from gas and electricity retail distribution. It does have a little energy exploration and production, but with the Australia Pacific LNG (APLNG) project due to commence LNG exports in mid-2015, that mix is going to change quickly. The company expects a step-change increase in earnings once it is fully operational.

It is developing gas resources in Queensland and working with companies like Senex Energy Ltd (ASX: SXY) and Beach Energy Limited (ASX: BPT) in the Cooper Basin to explore and commercialise oil and gas. Sourcing cheap resources and potentially exporting LNG for a relatively high price could give it a nice earnings spread.

Retail utility markets have a great base for income, but smaller energy rivals have started to chip away at market share through discounting directly to the consumer. The company must work harder to keep customers from switching.

Still, the steady income and earnings profile combined with the much higher dividend yield are enough to secure a first-half lead 2-0.

Oil Search

The energy producer and explorer is involved in the PNG LNG project, which has just started shipping LNG to Japan and other Asian customers. It has an advantage of starting deliveries before the APLNG.

With extra revenue coming in sooner, it can surge ahead and possibly make its way through Origin’s defence. The company said oil production output should rise as much as four times when the PNG LNG project is at full capacity around 2015 or 2016. Earnings are expected to rise in a step-change manner. That’s why Oil Search has a 34.5 PE. The market is looking forward to much higher earnings. A quick cross and a hard shot makes the score 2-1.

This stock is more geared towards growth with a low dividend yield. Investors have to pay up for the potential earnings rise, however great it may be. If Oil Search disappoints the market, though, the price could come off quickly.

For long-term investing that needs growth and dividend income, Origin is able to defend against further attacks, but doesn’t score itself before the final whistle blows.

Final Score 2 – 1

Origin notches up a win and keeps its ASX World Cup dream alive. Oil Search could be back for the next Cup a lot bigger and stronger once all that LNG is produced, so expect a great rematch.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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