S&P/ASX 200 Index (ASX: XJO) energy blue-chip share Origin Energy Ltd (ASX: ORG) has clinched a strategic alliance via acquisition which will see it extend its position as Australia’s leading energy retailer. The blue-chip share is also Australia’s third-largest energy company and our second-largest LNG producer. The Origin share price has risen by 8.1% this week.
A transformative acquisition
On 1 May, the company announced its intention to acquire 20% of UK energy retailer Octopus Energy for $507 million. This strategic partnership also includes an Australian license for the software product Kraken. This package is already in use in Australian renewable energy start-up Nectr. Nevertheless, the deal will see Origin exclude any further licenses in Australia. Industry feedback indicates the software will provide Origin with a “radical improvement” in customer experience.
In addition, Origin also forecasts pre-tax cash savings of $70 million to $80 million by FY22. Growing to $100 million to $150 million annually by FY24. This is in addition to the $100 million cost reduction program already underway.
Although modest in relation to the company’s portfolio, the acquisition also provides Origin with exposure to the UK energy retail sector. A market likely to undergo deregulation by 2023 with access to the larger European market. Octopus is growing organically by about 40,000 to 50,000 customers a month and there are licensing opportunities for the Kraken product globally.
Origin CEO Frank Calabria said, “This is an exciting opportunity because it delivers transformative change through a partnership with a company that is leading in customer satisfaction and experience in products and services that sit at Origin’s core.”
A defensive ASX energy blue chip
Origin’s retail operations provide a defensive mix of assets. Its revenue has reduced by 12% from December due principally to reduced LNG prices even though retail gas volumes rose 12% due to cooler weather in Victoria. The low Australian dollar has offset some of the reductions in LNG prices. Goldman Sachs expects a one-off earnings reduction of approximately $100 million from energy markets and bad debts due to COVID-19.
The company’s debt to equity ratio of 57.9% is higher than LNG industry stablemate Woodside Petroleum Limited (ASX: WPL) but equivalent or lower than other ASX blue-chip energy peers. In my view, it is an acceptable debt load for a capital intensive company.
The Origin share price has suffered a decline of ~34% year to date, leaving it with a price-to-earnings ratio (P/E) of under 10. This is the lowest of the energy large-cap shares and 6 points lower than its 10-year average P/E.
I believe Origin shares represent possibly the best value energy blue-chip in the sector. It has a strong balance sheet with financial discipline in executing cost outs. The company’s subsidiary APLNG is re-signing its contract with Chinese company Sinopec with no change to contract prices. The announcement of the Octopus Energy deal locks in future pre-tax savings and adds to customer growth in new markets.
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Motley Fool contributor Daryl Mather 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.