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Origin Energy share price jumps on big surge in gas earnings

Exposure to the LNG export market has saved Origin Energy Ltd (ASX: ORG) from a disastrous full year profit result.

The ORG share price jumped 2.6% to $7.39 in early trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index added 0.4% after the energy producer and retailer posted a 16% increase in FY19 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) and declared a 15 cents per share final dividend.

The increase was only made possible due to a 51% surge in earnings from Origin’s gas export joint venture project as that more than offset a doubling in corporate costs and a 5% decline in its Energy Markets retail business that’s hurt by price relief measures it had to offer households.

APLNG to the rescue

The public and political pressure on energy retailers to lower prices for domestic consumers is the key reason why Origin’s peer AGL Energy Limited (ASX: AGL) has been cast into the sin bin.

Fortunately for Origin, it has the APLNG project to offset the weakness as stronger oil prices have allowed the group to lift earnings from this part of its business to $1.89 billion despite flat production over FY18.

Investors will also be pleased that management now has a dividend policy as FY19 is the first year since 2016 that the group has paid a distribution.

“The board has also announced a dividend policy which will seek to pay shareholder distributions through the business cycle, targeting an ordinary dividend payout range of 30 to 50 per cent of free cash flow per year,” said Origin Chairman Gordon Cairns.

The gift that keeps giving

The lower than expected breakeven point for APLNG will give investors a further reason to cheer. This point was US$36 per barrel of oil equivalent (boe) in FY19, which is lower than management’s original estimate of US$39/boe to US$42/boe.

There’s scope for the breakeven point to fall further in FY20 as Origin is estimating this at between US$33/boe and US$36/boe.

We could also see a slight rise in overall production from the project too as the group believes output will come in at 680 to 700 petajoules (PJ) in the current financial year compared to 679 PJ in FY19.

Origin’s outlook

Hitting the higher end of these guidance range should more than offset the slight rise in capex and opex costs of $2.8 billion to $3 billion (it was $2.7 billion last year).

Corporate costs are also tipped to fall substantially to no more than $80 million as the big increase in FY19 was due to a one-off provision of $170 million that largely relates to the required environmental remediation at Osborne, a former gas works site in South Australia.

But don’t expect any turnaround in the Energy Markets business. The EBITDA for this division is tipped to fall to between $1.35 billion and $1.45 billion in FY20 versus the $1.57 billion it delivered last year.

That’s probably more bad news for AGL than for Origin though.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

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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