Should you buy Origin Energy Ltd at this share price?

Credit: Pieter van Marion

The share price of vertically integrated energy company Origin Energy Ltd (ASX: ORG) finished last Friday’s trading session 1.1% higher at $5.60.

For the week Origin gained 2.5% but remains down nearly 58% on where the stock was one year ago.

The recent gains take the share price further away from the 52-week low of $4.45 and could mark a turning point for the stock as it may suggest that the selling pressure has now passed.

If that’s the case then now could be an opportune time for investors to review their valuation for the energy giant. While the recent share price volatility is a consequence of the crash in oil prices and may have led to the stock being “oversold”, the long term share price performance will ultimately be based on Origin’s business fundamentals.

Like peers Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH), a significant factor in the fundamental value of Origin is the long term earnings power of its LNG project.

For Origin, the group’s stake in APLNG has required the commitment of billions of dollars for which it is expecting to earn a significant return on its investment over the decades ahead. Exactly what those earnings will be is unknown but valuing Origin does require an investor to make an estimate.

Based on analyst consensus forecast data provided by Morningstar, Origin is expected to experience a marked increase in earnings per share (EPS) in financial year 2017 with growth of 72% to 49.6 cents per share.

If this forecast proves accurate and if this level of EPS represents a level of maintainable earnings then the stock is trading on what would appear to be an undemanding price-to-earnings multiple of 11.3 times.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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