What? Investors in Origin Energy Ltd (ASX: ORG) must be feeling a little relieved! A shocking three months between September and December 2014 resulted in Origin's shares plunging over 40% from $16.21 to a three-year low of just above $10. Thankfully for long-term investors, a number of upbeat reports from brokers have seen the share price return to nearly $13 in the six months since.
What's new? Origin is essentially a defensive long-term LNG and energy play. The group's 37.5% stake in the Australia Pacific LNG (APLNG) project is expected to boost net profit and earnings by up to 50% in the 2016 financial year and potentially even more in the 2017 financial year. APLNG, which is Australia's largest coal seam gas to LNG project, is on schedule and budget with the first production expected from mid-2015.
Origin's exposure to the global oil market, through LNG contracts linked to the benchmark Brent index, saw analysts downgrade the company's future earnings as the oil price plunged below $50 earlier this year.
The difference between Origin and say Woodside Petroleum Limited (ASX: WPL), is Origin's 35% share of the Australian and New Zealand energy retailing industry. The division contributes about 60% of group earnings currently and is a fiercely competitive and low-margin business, but gives the company a ballast which should support the share price during times of oil price weakness.
What now? Earnings before interest and tax from the energy division are expected to increase by up to 20% over the next three years, however this rise should be dwarfed by the impact the new LNG project will have on earnings.
Earnings per share are predicted to be 61 cents this financial year and 90 cents per share in 2016, while the 50 cents per share dividend is expected to be maintained over the medium term as debt reduction is prioritised (net debt to equity ratio currently stands at 89%).
The trouble for investors looking at Origin is the current lofty price to earnings ratio of 21 and its exposure to the low oil price. Another fall in the oil price will no doubt see the share price crash again, however as mentioned previously, any share price fall will likely be less than that of pure play oil or LNG companies like Woodside, Santos Ltd (ASX: STO) or Oil Search Limited (ASX: OSH).
