Motley Fool Australia

Oil price surges: Are Origin Energy Ltd shares back in the buy zone?

oil rigs

What: The share price of leading integrated energy company Origin Energy Ltd (ASX: ORG) has rallied 18% since the beginning of calendar year 2016.

That’s good when compared with the measly 3% return from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

However, when placed into a medium term context, Origin’s 60% share price slump over the past five years, compared with the 31.5% gain in the index, makes it clear that Origin has been a significant underperformer for longer term shareholders.

So What: Given the cyclical nature of the oil and gas sector, it’s important investors take a longer term investment horizon.

In the case of Origin, two major factors to consider relate to the group’s interest in the Australia Pacific LNG (APLNG) facility.

1. Oil price – because Origin’s LNG contracts are priced with reference to the oil price the plunge in oil has been a major headache for the group.

Thankfully that headache is diminishing thanks to a rally in the oil price.

Last night, Brent crude rallied to over US$53 a barrel in the wake of comments by Russia that it would cooperate with OPEC to stabilise the oil market.

2. Train 2 enters production – another key factor for Origin is the performance of eastern Australia’s largest natural gas project APLNG.

With Train 1 having already been operating effectively for some months, investors have been eagerly awaiting the commissioning of Train 2, which adds further scale and operating efficiencies to APLNG.

Just this week, Origin released the pleasing news that APLNG “had produced the maiden LNG cargo from the second of its 4.5 million tonnes per annum production trains.”

Now What: This week’s announcement regarding Train 2, coupled with a more positive outlook for the oil price is welcome news for Origin’s shareholders.

While a rising oil price is also good news for a number of other LNG producers including Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH), my money is on Origin.

Reviewing analyst consensus data for Origin shows that expectations are for an increase of over 100% in earnings per share over the next two years to 55 cents per share for FY 2018.

Based on this forward estimate, Origin is trading on (in my opinion) an undemanding price-to-earnings multiple of just 10 times.

Man who said buy Kogan shares at $3.63 says buy these 3 ASX stocks now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

*Returns as of 6/8/2020

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.

Related Articles…