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What you need to know about Origin Energy Ltd’s surge in earnings and share price

The share price of Origin Energy Ltd (ASX: ORG) has powered up this morning on the back of a big jump in earnings and an upbeat outlook.

But it isn’t only the surge in earnings that is winning over investors this morning with the stock soaring 5.6% $8.77 after the energy company posted a 146% uplift in underlying earnings per share (EPS) to 24.3 cents as operating cash flow increased by $166 million to $552 million for the six months ended December 2017.

Don’t get me wrong, that is still an excellent outcome but as AGL Energy Ltd’s (ASX: AGL) results last week showed, a big uplift in earnings isn’t always enough to keep a company in investors’ good books ( click here to find out why this might be an overreaction).

AGL was punished on worries about aggressive price competition in the retail power space and this is also an issue for Origin with the company acknowledging that it had lost 47,000 customer accounts in the first half.

However, investors cheered the fact that the worst of the churn may be over with management reporting a net increase in customer accounts for the months of December and January.

This optimism is infectious and has helped lift AGL’s share price by 1.7% this morning to $22.15.

Unlike AGL though, Origin is much more exposed to rising oil prices thanks to its APLNG joint venture. Liquified natural gas (LNG) prices tend to follow oil but with a lag.

It is Origin’s Integrated Gas division, which houses the APLNG asset, that is the star performer as this part of the business delivered a 120% increase in the interim underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $630 million.

The Energy Markets division, which accounts for Origin’s power plants and retail business, posted a more modest 21% increase in underlying EBITDA to $891 million.

Investors were willing to forgive management for not restarting its dividend payments as Origin is focused on using excess cash reserves to pay down debt and ramp-up its APLNG project. The last time Origin paid an interim dividend was in 2016.

The market also brushed aside its statutory net loss of $207 million with management upgrading its full year underlying EBITDA guidance to between $1.78 billion and $1.85 billion. This compares to its earlier guidance of $1.7 billion and $1.8 billion for FY18.

Management also lowered its cash flow breakeven projections for APLNG to US$45 per barrel of oil equivalent (boe) from US$48/boe and re-iterated its gas production guidance of 245 petajoule (PJ) to 265 PJ for APLNG.

I believe the stock has more room to climb as it looks to be good value even after this morning’s price surge.

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Motley Fool contributor Brendon Lau owns shares of AGL Energy Limited. 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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