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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