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Why the Origin Energy (ASX:ORG) share price has dipped today

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The Origin Energy Ltd (ASX: ORG) share price and the Buru Energy Limited (ASX: BRU) share price are on the radar today, after both companies announced that Origin has secured farm-in permits in Buru’s Canning Basin oil field.

At the time of writing, the Origin Energy share price has slipped 0.4% to $4.88, while the Buru Energy share price has charged 12% higher to 10.5 cents.

What was announced this morning

Origin Energy has announced a farm-in with Buru for 7 permits covering 20,000sq km in Western Australia’s prospective Canning Basin.

A farm-in permit refers to an arrangement whereby a company acquires an interest in a lease owned by another company, on which oil or gas has been discovered or is being produced.

Under the agreements, Origin secures a 50% equity share in five permits with Buru Energy, and a 40% equity share in two permits with Buru and Rey Resources Limited (ASX: REY) – in exchange for carrying $12.3 million of their share of work program costs.

The total estimated spend by Origin over a 2-year period is expected to be approximately $35 million, inclusive of a two-well drilling program and seismic work.  

Origin also has contingent options to carry an additional $10.6 million of Buru and Rey’s costs over a four-year period.

In addition, Origin has the option to assume operatorship for any significant gas development, as well as any carbon capture and storage development.

Origin Executive integrated gas general manager Mark Schubert said the investment would give Origin opportunity in gas plays:

Origin will now hold positions in three large prospective onshore basins – the Beetaloo, Canning, and Cooper-Eromanga – giving us exposure to conventional and unconventional gas plays and what we believe are the most prospective shale formations in Australia.

Our interest in these seven permits lies in the strength of the gas resources following extensive analysis of the basin, and the longer-term potential for carbon capture and storage.

Schubert also said the investment opened the pathway for green gas offerings in the future, saying that “gas remains core to Origin’s strategy, as it can help drive the transition to lower emissions faster by supporting intermittent renewables and replacing more carbon intensive fuels”.

Quick take on Origin Energy’s business

Origin Energy has two main revenue sources – Australian energy retail, and liquified natural gas (LNG) export.

In the retail business, Origin Energy is one of three energy retailers in Australia controlling 80% of the market. The other two being Energy Australia and AGL Energy Limited (ASX: AGL).

The retail business is relatively stable, where each of the three players essentially owns similar percentages in market share. The retail energy market in Australia is also highly regulated, so significant future growth from this segment is restricted.

Origin Energy’s LNG business on the other hand, is a volatile yet potentially highly lucrative business. The company’s flagship is its 37.5% stake in a company called Australia Pacific LNG (APLNG), a major liquefied natural gas exporter in Queensland. 

How has the Origin Energy share price performed in 2020

Origin Energy delivered a flat underlying profit of $1,023 million in FY 2020. 

In its latest guidance to the market in November, the company continues to expect underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of between $1,150 million to $1,300 million for FY21. This is down 11% to 21% from $1,459 million in FY 2020.

The Origin Energy share price has fallen by more than 42% this year as the coronavirus pandemic took a toll on its export business.

The share price has a 52-week high of $8.82 reached in January, and a low of $3.75 reached in March.

At this price level, Origin commands a market cap of $8.63 billion.

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Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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