What: Energy giant Origin Energy Limited (ASX: ORG) shares are trading over 4% higher today in an overall market which has seen the S&P/ASX 200 Index (ASX: XJO) rally 0.5% by late-morning.
Despite reporting a 6% fall in underlying profit to $713 million – which was weaker than the consensus estimates – investors appear to have brushed off the surprise, most likely due to the announcement that a hybrid security is set to replace the proposed equity raising. This is good news for current shareholders as it will limit the dilution of their holding and maximise their share of the soon-to-be-completed APLNG Project.
So what: The decline in earnings was driven by a lower contribution from the Energy Markets division which, "faced challenging conditions placing pressure on electricity margins" according to Chairman Gordon Cairns.
However, many investors' eyes remain firmly on the 'LNG prize'. After seven years of development, Australia Pacific LNG is scheduled to enter production in mid-2015. It is forecast to deliver a step-change in earnings of around $1 billion more per year from 2017 for the group.
Now what: Management has commented that it expects to increase distributions to shareholders in the coming periods which will be welcome news for income-seeking investors given the stock currently trades on a dividend yield of just 3.4%.
With underlying earnings per share down 7% to 64.8 cents for FY 2014 this equates to a price-to-earnings ratio of 22.8. More important however is the $1 billion of increased cash flow which is forecast to become available each year from FY 2017. Factor this growth into the equation and the pricing of Origin's stock becomes much more appealing and could act as a catalyst to drive it higher.
