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Why this broker just upgraded Origin Energy Ltd (ASX:ORG) shares to “buy”

The share price of Origin Energy Ltd (ASX: ORG) may have found its feet as the underperforming stock is among the best performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) today on stronger oil prices and a broker upgrade.

Shares in the vertically integrated energy company jumped 2.1% to $8.24 at the time of writing as the top 200 index dipped 0.1% into the red.

Origin is still down 13% since the start of 2018 but bargain hunters are stepping up to buy the stock after crude oil prices jumped in overnight trade as a hurricane threatens to shut down US supply and traders grow increasingly wary about sanctions against major oil exporter, Iran.

That’s good news for the all energy stocks with Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO) rallying by more than 1%.

Origin is also getting a boost from Ord Minnett after the broker upgraded the underperforming stock to “accumulate” from “hold” as it believes Origin has been oversold following concerns about its results and threats by the federal government to tighten regulations against the major power companies, including AGL Energy Ltd (ASX: AGL).

“Ord Minnett recognises the recent stock price derating has been driven mainly by a deterioration in confidence in the company’s financials following the emergence of additional hedge costs that had been excluded from underlying operating earnings (EBITDA),” said the broker.

“We see valuation as compelling, however, with the stock trading on a price to net present value (P/NPV) ratio of only 0.8x, and we believe the current price adequately compensates for the immediate risks, including the political environment.”

But don’t expect the market to quickly forgive and forget as many are still sore with management dropping the bombshell on them in regards to the $160 million in annual costs for electricity hedge premiums that were excluded from Origin’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA) calculation.

Origin will need some time to win back the trust of the market and that means there is no big rush to buy the stock, in my opinion, as it will likely stay cheap for a while yet.

Throw in the fact that the federal government has a national energy policy that makes Donald Trump’s trade strategy look coherent, and you will know why it might be better to hang back a little before jumping on this bargain stock.

At least Origin is exposed to the high oil price given its stake in the APLNG project. The same can’t be said of its peer AGL Energy.

I like both stocks but I just can’t find a reason to buy either right now.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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 Scott Phillips.

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