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Why Origin Energy Ltd (ASX:ORG) is outperforming the S&P/ASX 200 today

The Origin Energy Ltd (ASX: ORG) share price is rallying 1.1% to a one-week high of $7.25 in after lunch trade following the release of its quarterly production report today.

That’s significantly better than the flat performance by the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index and most of its sector peers with Oil Search Limited’s (ASX: OSH) share price dipping 0.3% and Santos Ltd’s (ASX: STO) share price falling 1.2% at the time of writing.

Does the bounce signal that the stock has found a bottom after Origin Energy’s share price hit a more than one-year low of $6.95 last week?

There’s no doubt that the stock is starting to look good value compared to its historical valuation and management’s quarterly update will give bargain hunters good reason to target the stock.

Origin Energy announced that Integrated Gas revenue has jumped 12% to $640 million in the three months to end September due to higher commodity prices and the continued good performance of its Australia Pacific LNG joint-venture project.

Origin Energy benefits from the rising crude oil prices as LNG prices tend to follow the oil price. The Brent crude benchmark is up 7% in the latest quarter and is up 26% over the past year.

Just as pleasingly, the company’s controversial Energy Markets business (that sells electricity and gas to consumers and businesses) is also performing well with electricity sales increasing 4% and natural gas sales improving 6% over the previous quarter.

Strong seasonal demand and new short-term contracts in Queensland pushed gas sales to retail and business customers up by 18% and 25%, respectively.

But rising sales in the Energy Markets business could be a double-edged sword. The federal government is threatening to unleash a Royal Commission into the sector and has introduced new rules to depress energy prices to win votes ahead of next year’s election.

There’s a perception that large integrated energy companies like Origin Energy and AGL Energy Limited (ASX: AGL) are gouging consumers and routing the system.

Further new regulations or a Royal Commission will be bad news for the sector and you only need to look at the painful de-rating in the AMP Limited (ASX: AMP) share price and Commonwealth Bank of Australia’s (ASX: CBA) share price to see how much damage such a development could cause.

However, I think the bad news is already in Origin Energy’s share price and the stock could re-rate on any sign that the government is losing interest in pursuing this radical course of action.

Origin Energy is not without risks and those looking for what may be less volatile alternatives may want to read this report from the experts at the Motley Fool.

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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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