Origin Energy Ltd shares soar 9.3% – Do more gains lie ahead?

On Monday, oil stocks were back in vogue after being sold down last week. At the close of trade, Origin Energy Ltd (ASX: ORG) had soared 9.3% to $5.85.

Investors looking for a way to get exposure to a rebound in oil prices have a multitude of options, but all come with their own individual set of risks.

For example, a “pure play” oil producer such as Santos Ltd (ASX: STO) is one option and in theory at least should provide investors with a closer correlation to oil price moves. This can be a positive as well as a negative.

Alternatively, an investor could buy an oil service company such as MMA Offshore Ltd (ASX: MRM) which is exposed to the oil market although not as directly.

A third option is to buy shares in a diversified energy company such as Origin Energy Ltd (ASX: ORG).

Origin earns significant revenues from its oil and gas producing assets which the company refers to as its Integrated Gas business.

Importantly however, Origin’s earnings are not completely reliant on its Integrated Gas business.

Origin operates a substantial Energy Markets business which was highlighted at a recent Investor Day presentation.

According to the presentation, the Energy Markets division is:

  • achieving significant growth in gas margins
  • maintaining electricity margins
  • reducing operating costs and capital expenditure, leading to an uplift in earnings
  • remains on track to achieve a $100 million reduction in natural gas and electricity cash cost compared with 2014 levels
  • expects strong growth opportunities over the next two years

While the market often gets the valuation of stocks right, at times it certainly gets them wrong. It’s possible the market’s discounting of Origin’s Integrated Gas business does not fairly account for the group’s Energy Markets business.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. 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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