Despite Origin Energy Limited (ASX: ORG) enjoying a number of positive attributes, as Warren Buffett's business partner Charlie Munger likes to advise – "invert, always invert." What Munger is getting at is the importance of attacking your investment thesis; to look at it from other points of view; and to play devil's advocate.
So while there is much to like about Origin, here are three reasons to be wary of the stock.
1) S&P downgrades to negative
According to the Australian Financial Review, ratings agency Standard & Poor's has downgraded Origin's credit rating to negative. S&P cited point two's weak demand as a contributing factor in the downgrade, while also noting that the vertically integrated energy producer's debt levels had increased significantly at a time when cash flows have been under pressure.
2) Weak electricity demand
Energy retailers such as Origin and AGL Energy Ltd (ASX: AGK) are facing a challenging outlook in terms of domestic demand for energy. There are a number of drivers of this including aggressive price discounting by newer market entrants and excess capacity due to the closure of significant manufacturers which previously utilised significant electricity volumes and the effect of high levels of roof-top solar panel installations.
3) US LNG competition intensifies
Australian investors have been getting increasingly excited about the impending export boom of Australian LNG. Firms including Origin but also others such as Oil Search Limited (ASX: OSH) and Santos Limited (ASX: STO) are all getting close to entering the production stage on their significant respective LNG Projects. Despite this seemingly attractive export potential, the 'great unknown' for local producers is the concurrent boom in US LNG export capacity. Some commentators suggest the low cost of US-produced LNG will undercut the breakeven point of some major Australian LNG projects – making their viability questionable.
Foolish takeaway
It's impossible to predict the future long-term average LNG export market price, however it is obviously a key factor in the future earnings potential of Origin. The entry of the USA as a potential major LNG exporter is an unexpected game changer. Of the above three reasons to be wary, US competition creates a major unknown and the biggest potential risk for shareholders.
