Earnings season is in full swing. One company's results I am keeping an eye on is Origin Energy Ltd (ASX: ORG) shares.
Earnings results can lead to significant share price movement.
This can give investors both increased opportunity and risk.
On one hand, investing before a company releases its February earnings can offer big upside if results beat expectations.
However it also carries higher risk because disappointing results can lead to sharp price drops.
The team at Ord Minnett has provided an updated outlook on Origin Energy shares ahead of its earnings results on Thursday, 12 February.
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Headwinds blowing for Origin Energy shares
Origin Energy is an integrated energy company engaged in the exploration and production of natural gas, electricity generation, wholesale and retail sale of electricity and gas, and sale of liquefied natural gas in Australia and internationally.
According to the report from Ord Minnett, the company posted December-quarter LNG production and revenue ahead of its forecasts.
Ord Minnett said the stronger realised pricing in the quarter was likely driven by sales into the spot LNG market. However this raises a question over whether the performance can be repeated in coming quarters considering weak domestic gas demand.
According to the report, volumes in Origin's electricity and gas volumes in its energy markets division were weak, with retail volumes stable but business demand falling.
Concerns over UK business
Ord Minnett also raised questions over Origin Energy's UK business – Octopus Energy.
It said Origin did not provide formal quantitative guidance on earnings from its UK Octopus Energy business but was at pains to emphasise the retail energy and software group's seasonal bias to the second half of the year.
We note prior FY26 guidance for Octopus operating earnings (EBITDA) of $0–150 million was not mentioned, leading us to view it as being at risk considering persistent problems with bad debts in the retail segment in the UK.
Post the result, Ord Minnett raised FY26 EPS estimate by 4.1%, largely due to higher full-year LNG sales, while FY27 and FY28 forecasts were cut by 5.2% and 6.0% .
This incorporates increased depreciation and amortisation estimates and downgrades to expectations for Octopus.
Price target update
Based on this guidance, Ord Minnett has slightly increased its price target to $11.00 (previously 10.80).
Last week Origin Energy shares closed at $10.91, indicating it is currently trading close to fair value.
Ord Minnett also has a hold recommendation on Origin Energy shares.
The rise in our FY26 EPS forecast leads us to increase our target price to $11.00 from $10.80, but we remain cautious on Origin given the headwinds we see – increased capital expenditure to maintain APLNG production, ongoing bad debt problems at Octopus, weaker wholesale electricity pricing, and a likely fall in spot LNG prices – and remain at Hold.
