Is the worst over for Origin Energy Ltd (ASX: ORG)? That may sound like a strange question to ask given that the stock has slumped to an 11-year low after it emerged from a trading halt.
But this is the thing investors should be chewing over as shares in the energy producer and retailer crashed 8.9% to $5.56 following its $2.5 billion capital raising.
While the share price slump is a shocker, it is still trading above the $4 a new share offer price and the theoretical ex-rights price of $5.32 a share (the 4-for-7 retail entitlements can be traded on the ASX).
Of course the overnight surge in the oil price is giving energy stocks a boost and if you take that into account it could take some gloss out of Origin's share price reaction.
Nonetheless, Origin is a different company to what it was pre-raising as the much needed cash injection will give it plenty of breathing room in this lower oil price environment that is threatening the viability of its APLNG gas project in Queensland.
It is encouraging to see Standard & Poor's reaffirm its credit rating on Origin and the additional cash on its balance sheet will set the platform for a re-rating in the depressed stock.
But investors may have to be patient as the potential re-rating may still be some way away. For one, Origin and its peers are still at the mercy of the wildly fluctuating oil price.
While the downside risk for crude oil remains, I suspect we will start to see higher prices at the end of the year or early in the New Year as the commodity tends to perform well during the period due to seasonal factors.
The second issue could be harder to overcome. Origin management does not have a good track record in making good investment decisions. You only have to look at its investment in gas fired generation and other technologies to see examples of this.
Winning back investor confidence would be a trickier task that will take longer to resolve. So while the stock looks like a value buy to me following its equity raising, the stock isn't for the faint hearted.
Its peer Santos Ltd (ASX: STO) will probably be watching Origin closely as it too is probably contemplating selling new shares as part of its much needed capital raising exercise.
If Origin shares can regain some momentum on the back of a partial re-rating, it will go a long way to building the case for Santos to follow suit even though management has indicated that an equity raising is its least favoured option.
Further, the fact that the stock has recovered around 14% of its value this month will certainly bolster the case for a new share offer.
I would avoid debt-laden Santos until there is greater clarity on its funding.
