Leading broker says the Origin (ASX:ORG) share price is dirt cheap

The Origin Energy Ltd (ASX:ORG) share price could be dirt cheap according to one leading broker. Here’s what you need to know…

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The Origin Energy Ltd (ASX: ORG) share price was well and truly out of form last week and tumbled notably lower.

The energy company’s shares were among the worst performers on the S&P/ASX 200 Index (ASX: XJO) with a decline of approximately 10%.

Why did the Origin share price crash lower?

Investors were selling Origin’s shares last week after it downgraded its earnings guidance for FY 2021.

Origin made the downgrade following an adverse and unexpected outcome on a domestic gas contract price review and continued headwinds in energy markets’ operating conditions.

Management advised that it is now expecting its energy markets division to post a 30% to 35% decline in operating earnings in FY 2021. It also warned that FY 2022 would be equally difficult.

Is this a buying opportunity?

One leading broker that believes the weakness in the Origin share price has created a buying opportunity is Goldman Sachs.

According to a note this morning, the broker has retained its conviction buy rating but trimmed its price target slightly to $6.50.

Based on the current Origin share price, this implies potential upside of over 50% over the next 12 months.

What did Goldman say?

Goldman Sachs thinks that it is worth sticking with Origin and believes FY 2022 will be the bottom for its Energy Markets business.

It said: “The Energy Market earnings downgrade is partly linked to higher gas costs based on an arbitrated price review of Otway gas offtake contracts with Beach Energy. The price outcome appears to look through current market conditions and applies pricing consistent with ACCC contract pricing from January 2018 to July 2020, logically this should imply a future benefit for Origin’s gas book from 2023, as the next price reset looks back to pricing from Jan 2021 while we expect the gas market to tighten from 2023.”

“This reinforces our view that FY22 will be the trough year for Energy Markets, with a recovery likely from 2023. The rebound in oil prices over the past 6 months is expected to deliver capital management in FY22 with an improving outlook for Energy Market returns,” its analysts added.

The broker also notes that the current Origin share price ascribes no value to the Energy Markets business.

Goldman said: “On current prices, the Energy Markets business looks essentially free, where we value APLNG on stand-alone valuation of ~$5.00/share (based on a blend of ~6x EV/EBITDA and DCF on US$60/bbl LT).”

It is for this reason the broker has the confidence to keep Origin’s shares on its conviction buy list.

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Motley Fool contributor James Mickleboro 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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