We invested in Origin under a capital raising the company conducted last October. The company then set expectations as to how the company would progress (also noting the enactment of the oil price hedging for FY-17 announced since then). The company has progressed as we expected.
The oil price is not within the company's control (obviously), and it is likely to remain depressed longer than was predicted. The company is taking steps to address this (for instance, the LNG project's cost reduction efforts have ramped up, so that Origin's $1b future contribution, until the project becomes self-funded, remains unchanged). It still has the levers to adjust the business for a lower oil price world. The company, unsurprisingly, flagged the possibility of suspending the dividend should oil prices continue their current low prices through H2. Asset sales (including the recently concluded Mortlake sale) are progressing, to raise >$800m.
The company's Energy Markets division (which includes energy generation and retailing) grew its earnings (before interest, tax, depreciation and amortisation) 16% to $721m - a strong result. Natural gas volumes and margins improved, electricity was stable and the cost to serve customers decreased. We assess the market is undervaluing this division and consequently the whole of the company - as the focus remains on the LNG project.
Earnings from the company's Integrated Gas (gas and oil exploration and production) division fell 50%, to $137m. Increased exploration expenses, lower liquids prices and sales volumes and the sale price of gas into the LNG project impacted earnings. The LNG project is progressing, with 5 LNG shipments made in the half. There has been a delay to Apr-16 in technical handover from Bechtel (which we don't consider significant in the scheme of things and not unsurprising on such a large scale technical project). How do we view this side of the Origin investment? No meaningful value is being ascribed to it now, and should the oil price recover over the longer term, shareholders (including us) will be rewarded.
Overall, earnings decreased 21.1% vs the pcp and, as expected (as advised at the raising), the dividend was cut to 20cps per year. Over the half, debt was reduced by $5.5b (including the raising and the sale of Contact). The company is targeting net debt below $9b in FY-17.
Origin reaffirmed guidance issued at the time of the raising - FY-16 and FY-17 earnings before interest, tax, depreciation and amortisation (underlying) of $1.45 to $1.55b and $1.90 to $2.10b respectively.
As an aside: the company confirmed their intent to redeem the Origin hybrids (ORGHA) in Dec-16 - good news.