The Origin Energy Ltd (ASX: ORG) share price will be on watch today after the energy company released an investor update.
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What was included in the update?
Origin's update gave investors a summary on how it performed in FY 2020 and its expectations for FY 2021.
In respect to the former, the company had a mixed year and delivered a flat underlying profit of $1,023 million in FY 2020. This was driven by lower corporate and LNG hedging costs being partly offset by a lower electricity margin.
This led to the Origin board declaring a total dividend of 25 cents per share, which was also flat on the prior year.
What is Origin expecting in FY 2021?
This morning Origin reconfirmed its Energy Markets guidance for FY 2021.
It continues to expect underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $1,150 million to $1,300 million. This will be down 11% to 21% from $1,459 million in FY 2020.
Positively, management has upgraded its Integrated Gas guidance for FY 2021. It now expects production of 675-705 PJ, compared to prior guidance of 650-680 PJ. It has also lowered its distribution breakeven to US$25-29/boe, compared to its prior guidance of US$27-31/boe.
Based on these estimates, management is estimating a free cash flow (FCF) yield of 12% to 15% for FY 2021. It notes that this reflects its resilient businesses with low cost operations and limited near term investment required.
This bodes well for its dividends, with management noting that its dividend payout ratio will be 30% to 50% of free cash flow.
Furthermore, it advised that free cash flow surplus cash will be allocated based on the greatest need and highest risk adjusted return. This includes maintaining its target capital structure, investing in growth, and additional returns to shareholders.
Is Origin a buy?
One broker that is positive on Origin is UBS. Earlier this month it put a buy rating and $7.40 price target on the company's shares.
Based on the current Origin share price, this price target implies potential upside of 41% over the next 12 months excluding dividends.
It believes its shares are undervalued based on current spot oil prices.
