In April, both major ratings agencies (Standard & Poors and Moody's) cut Origin Energy Ltd's (ASX: ORG) credit rating to the lowest possible investment grade with a negative outlook – meaning there is potential for further trouble.
Since the downgrade came through, Origin executive Grant King has indicated – as reported in Fairfax media this morning – that Origin's stake in NZ-listed oil company Contact Energy Limited could be up for sale.
Mr King was quoted as saying on Contact's role in maintaining Origin's credit rating: "That role is no longer as significant and therefore Contact is like any other asset in the business…. if it's more valuable to someone else and we felt we could deploy the capital more effectively somewhere else, we'd do so"
This raises interesting questions for shareholders, particularly with Origin's tricky fiscal situation. Origin Energy carries $12 billion in debt and just $224 million in cash as of its December 31 half-year report. Given that its 53.1% stake in Contact Energy is worth NZ$2.1 billion – and the New Zealand Dollar is at record highs against the AUD – a sale of Contact Energy must seem appealing.
Finding a buyer for the business could be a struggle however. Contact looks to be trading at a high valuation which is great news for Origin but less so for a prospective buyer, and it will be hard to sell a stake of that size into a small market like New Zealand without crushing prices.
Instead Origin might consider dual-listing its stake onto the ASX, similar to companies like Mighty River Power Ltd. (ASX: MYT) and Genesis Energy Ltd (ASX: GNE) which are also NZ-listed. A successful sale or listing will free up an enormous amount of cash that could be used to develop more lucrative prospects like Origin's interest in AWE Ltd's (ASX: AWE) Senecio gas field. Origin's plan to become Australia's leading solar energy provider will also require serious investment, considering it's up against stiff competition in AGL Energy Ltd (ASX: AGL), which is already Australia's leading generator of renewable energy.
I'm not bullish on Origin even at today's prices – APLNG project notwithstanding – but Contact Energy does look ripe for selling and the cash influx could be just what's needed to reverse shareholder fortunes and get the company back on track.
