The Origin Energy Ltd (ASX: ORG) share price surged today and is among the best performing large cap stock after Macquarie Group Ltd (ASX: MQG) pointed out that the stock is cheap following Origin's quarterly update.
The ORG share price surged 3.9% to $7.66 today when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has gained 0.8%.
The irony is that the stock actually dipped yesterday when Origin released its quarterly update. The difference is that Macquarie has reiterated its "outperform" recommendation on the stock and pointed out the circa 20% upside to its target price of $9.12 per share.
The good gas
"APLNG production at 169mt was as expected, albeit realised price was ~$0.60/GJ better. Capex continues to track lower than guidance adding to cash generation," said the broker.
"Cashflow to ORG at $860m is ~$85m better than expected."
Origin's energy market (EM) business also experienced a recovery thanks to the hotter than normal weather, although this was offset by market share losses – particularly in the lower margin business market.
"The pressure in EM is mitigated by strength in APLNG. Both are in a relative stable capex cycle, EM particularly low, thus cash generation at ORG remains very strong with forecast net debt down $0.9bn to $5.6bn by year end," said Macquarie.
"This pace of debt reduction is anticipated to continue in FY20 which provides the scene for a more progressive dividend policy."
Big dividend uplift
Talking about progressive dividends, Origin's forecast dividend payment is forecast to jump from 20 cents a share in FY19 to 42 cents in the new financial year. This gives the stock a yield of nearly 8% in FY20 once franking credits are included.
Unlike its peer AGL Energy Limited (ASX: AGL), Origin has gas production from its APLNG joint venture to offset weakness in the retail energy business. It's the ramp up of APLNG that makes Origin worth buying in my view.
Macquarie has taken the opportunity to upgrade its earnings forecasts for Origin too. The broker has increased its FY19 earnings by 4% to reflect the strong performance of APLNG in the quarter, and lifted its FY20 estimates by 10% due to an upgrade in its crude oil price forecast.
The LNG price tends to follow the oil price but with a lag. A higher oil price will benefit gas producers and this includes Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO).
