Origin Inks Big Energy Deal

By David Dittman • December 26, 2012 • Pacific Digest

AE Portfolio Aggressive Holding Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) has signed a long-term deal to supply natural gas to two of China-based base metals miner MMG Ltd’s (Hong Kong: 1208) Queensland, Australia, projects at more than double the current gas price and about 50 percent higher than the previous high for a long-term supply deal.

Under terms of the agreement Origin will sell MMG up to 22 petajoules (PJ) of gas over a seven-year period, commencing with supply to the Century zinc mine 2013 and continuing with the Dugald River zinc mine when it goes operational in 2015. MMG will pay close to AUD9 a gigajoule.

The price compares with current prices of between AUD3 andAUD4 a gigajoule now being paid and a price of about AUD6 a gigajoule under terms of a 10-year deal executed in November 2011 between AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY) and Xstrata Plc (London: XTA, OTC: XSRAF, ADR: XSRAY) for supply to the latter’s Mount Isa mine in north Queensland beginning in 2013.

Origin is an integrated energy company, with oil and gas exploration and production, power generation and energy retailing operations.

It’s one of Australia’s largest energy retailers, with 4.4 million electricity, natural gas and liquefied petroleum gas (LPG) customers. It also controls one of Australia’s largest and most flexible generation portfolios, with approximately 5,900 megawatts of capacity through either owned generation or contracted rights.

Through Australia Pacific LNG, a joint venture with ConocoPhillips (NYSE: COP) and China Petroleum & Chemical Corp, better known as Sinopec (Hong Kong: 386, NYSE: SNP), Origin is developing one of Australia’s largest coal seam gas (CSG) to liquefied natural gas (LNG) projects. The company controls Australia’s largest base of proved plus probable CSG reserves.

According to a statement released by Origin, the deal with Melbourne-based and Hong Kong-listed MMG is a way for Origin to monetize its gas resources at attractive prices. The gas will be sourced from Origin’s east coast fuel portfolio.

It also demonstrates that Origin is well-positioned to benefit from what observers, including the Australian Energy Regulator, forecasts will be a tripling of natural gas demand in eastern Australia.

Origin has also signed an agreement to sell a portion of its future oil and condensate production from its Australian East Coast and New Zealand production assets for USD300 million. The company will use these proceeds to pay down existing debt. Delivery of oil and condensate will begin in 2015.

These transactions continue Origin’s strategy of finding new ways to turn its energy portfolio into cash.

Management most recently guided for flat to 5 percent growth in fiscal 2013 earnings, before interest, taxation, depreciation and amortization (EBITDA). This is a downward revision from a prior forecast of 5 percent to 10 percent growth. Origin expects a 5 percent to 10 percent decline for net profit after tax (NPAT) after previously predicting a “flat” fiscal 2013 compared to 2012.

Origin identified the costs of complying with the Australian government’s Small-Scale Renewable Energy Scheme (SRES) as the main driver of its guidance revision, noting that an increase from 8 percent to 19 percent its liabilities under the scheme will boost costs by AUD40 million.

The SRES creates a financial incentive for homeowners and businesses to install eligible small-scale installations such as solar water heaters, heat pumps, solar panel systems, small-scale wind systems or small-scale hydro systems.

As of Jan. 1, 2011, entities making wholesale purchases of electricity–including energy retailers such as Origin and AGL–must demonstrate their support for the small-scale technology industry by purchasing Small-Scale Technology Certificates (STC). Australia’s Clean Energy Regulator sets the Small-Scale Technology Percentage (STP), which dictates how much retailers have to purchase in the form of STCs, on an annual basis.

Electricity demand is also declining in key markets such as New South Wales, where demand is off by 6 percent for the first four months of fiscal 2013 compared to the same period of fiscal 2012. Customer churn is also a concern, for Origin and other electricity retailers, as competition heats up.

Origin hit a 12-month closing low of AUD9.84 on the Australian Securities Exchange (ASX) on Nov. 16, days after management’s latest earnings guidance. Origin shares last changed hands at AUD11.58 on the ASX on Monday, Dec. 24. The ASX was closed on Christmas Day, Dec. 25, and on Boxing Day, Dec. 26. The stock’s 12-month closing high of AUD14.15 was reached on Jan. 27, 2012.

Over the long term Origin’s energy markets business gives it a solid foundation for predictable cash flow. And its stake in AP LNG will deliver a strong boost to earnings and cash flow when it’s completed; AP LNG is on track to deliver first gas in 2015.

Management has forecast long-term earnings per share growth of 10 percent to 15 percent, which should underpin solid dividend growth as well.

Origin has never cut its dividend and actually stepped up its rate substantially during the Great Financial Crisis. The company paid AUD0.116603 and AUD0.12632 for interim and final dividends for fiscal 2008. It declared a special dividend of AUD0.242923 in October 2008 the paid that amount for interim and final dividends for fiscal 2009.

The company has ample liquidity, with cash and undrawn facilities totaling AUD5.2 billion, well above the estimated AUD3.6 billion that is its portion of the remaining spend on AP LNG and sufficient to cover its non-AP LNG requirements.

Among analysts that cover the stock eight rate Origin a “buy,” three rate it a “hold” and two say it’s a “sell.” The average 12-month price target among the eight analysts who provide such a forecast is AUD14.69. The implied upside based on Origin’s Dec. 24 closing price of AUD11.58 is 26.8 percent.

At these levels Origin is yielding 4.3 percent.

Origin trades on the ASX under the symbol ORG and on the US over-the-counter (OTC) market under the symbol OGFGF.  It also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol OGFGY. The ADR is worth one ordinary, ASX-listed share.

The company’s fiscal year runs from Jul. 1 to Jun. 30. Origin reports full financial and operating results twice a year; it typically posts first-half results during the third week of February, with full fiscal year numbers out in late August. It will report results for the first six months of fiscal 2013 on Feb. 21, 2013.

Interim dividends are usually declared in February along with first-half results. Final dividends are usually declared in August along with full fiscal-year results. The most recent interim dividend of AUD0.25 per share was declared Feb. 23, 2012; it was paid Mar. 30, 2012, to shareholders of record as of Mar. 5, 2012. Shares traded “ex-dividend” on this declaration as of Feb. 28, 2012.

The final dividend of AUD0.25 in respect of fiscal 2012 second-half results was declared Aug. 23, 2012. It was paid Sept. 27, 2012, to shareholders of record on Sept. 3, 2012. It traded “ex-dividend” as of Aug. 28, 2012.

Dividends paid by Origin are “qualified” for US tax purposes. The Australian government withholds 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

The Roundup

Here are dates for the next round of reporting season, which for most companies will be for the first half of fiscal 2013. We’ve noted where the reporting period differs.

Please consult the Portfolio tables at www.AussieEdge.com for current advice.

Conservative Holdings

  • Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
  • AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Feb. 27, 2013 (confirmed)
  • APA Group (ASX: APA, OTC: APAJF)–Feb. 20, 2013 (confirmed)
  • Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Feb. 8, 2013 (full year 2012, estimate)
  • Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Feb. 18, 2013 (first quarter fiscal 2013, estimate)
  • Cardno Ltd (ASX: CDD, OTC: COLDF)–Feb. 14, 2013 (estimate)
  • CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Feb. 13, 2013 (confirmed)
  • Envestra Ltd (ASX: ENV, OTC: EVSRF)–Feb. 21, 2013 (confirmed)
  • M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Feb. 27, 2013 (estimate)
  • Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Feb. 25, 2013 (estimate)
  • SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Feb. 22, 2013 (estimate)
  • Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Feb. 7, 2013 (confirmed)
  • Transurban Group (ASX: TCL, OTC: TRAUF)–Feb. 5, 2013 (confirmed)
  • Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Feb. 18, 2013 (estimate)

Aggressive Holdings

  • Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Feb. 25, 2013 (estimate)
  • BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Feb. 20, 2013 (confirmed)
  • GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 21, 2013 (estimate)
  • Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Feb. 18, 2013 (estimate)
  • Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Feb. 11, 2013 (estimate)
  • New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Mar. 19, 2013 (estimate)
  • Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Feb. 21, 2013 (full year 2012, estimate)
  • Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Feb. 21, 2013 (confirmed)
  • Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Feb. 24, 2012 (full year 2012, confirmed)
  • WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Feb. 28, 2013 (estimate)
Following are links to our discussion and analysis of the most recently announced financial and operating results for Portfolio Holdings.

Conservative Holdings

Aggressive Holdings

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