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Could strong results see the Origin Energy share price rise further?

The Origin Energy Ltd (ASX: ORG) shares price closed higher yesterday, reversing the downward moves the stock made earlier this week. Origin has largely fallen alongside the ASX recently, but full-year financial results released before the market opened on Thursday morning appeared to change investors’ minds on the stock.

What’s been happening?

Origin shares had slipped from $7.94 on 31 July to $7.08 on 6 August, while the Australian share market was suffering generally. A proposed government natural gas reserve for the eastern Australian states, based on a similar scheme in Western Australia, could have made investors nervous about Origin in early August. Resources Minister Matt Canavan announced that the government would consider the scheme, and bring forward a review of the Australian Domestic Gas Security Mechanism, which could be used to force producers like Origin to limit exports during an Australian domestic shortfall. However, these potential threats weren’t enough to stop Origin shares rallying alongside the ASX. By 14 August Origin was back up to $7.44 per share, before again falling alongside the ASX to $7.02.

However, Thursday morning’s financial results seem to have changed the story. The ASX 200 rose only 0.29% yesterday, while Origin shot up 2.36% to $7.37.

Strong performance in FY2019

Origin announced a statutory profit of $1.211 billion for the 2019 financial year, a 333% increase on 2018. Underlying profit was up 42% to 1.028 billion. Operating cash flow is up 35% to $1.325 billion, and adjusted net debt is $1.1 billion lower at $5.4 billion.

Origin also announced a final dividend of 15 cents per share, making its full year dividend a fully franked 25 cents per share. This isn’t a huge dividend relative to Origin’s performance, as the company targets ‘sustainable shareholder distributions through the business cycle’, with a dividend payout range of 30–50% of free cash flow each year. Remaining free cash flow is dedicated to growth.

Regulatory threats and cautious optimism

In a media release to the ASX, also published Thursday morning, Origin CEO Frank Calabria acknowledged that:

Energy Markets faced headwinds, with a highly competitive retail market and regulatory intervention impacting electricity markets. In light of this, we have been focused on enhancing the customer experience, simplifying our Retail business by targeting cost savings of greater than $100 million by FY2021 and growing new revenue streams in centralised energy services, solar and storage and broadband.

Potential regulatory issues were a theme in Origin’s announcements, with the outlook guidance in the same media release careful to specify that:

Origin provides the following FY2020 guidance on the basis that market conditions do not materially change and that the regulatory and political environments do not result in further adverse impacts on operations.

However, with that said the outlook was positive, with energy markets earnings before interest, taxes, depreciation, and amortization expected to be $1.35–$1.45 billion.

These full year results, with strong profit and cash flow growth and positive guidance for the year to come, could see the Origin share price rise further.

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Motley Fool contributor Tyler Jefferson 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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