Origin Energy Ltd (ASX: ORG) has been booted out of the S&P/ASX 20 (Index: ^AXTL) (ASX: XTL) and replaced by Transurban Group (ASX: TCL).
Origin Energy's share price has hardly moved in trading today, down 2 cents at $5.06. But much of the damage had already been done. Origin's share price has dropped 56% since a year ago and is a long way off the highs of $14.18 reached in early September 2014.
Back then, the oil price was trading above US$100 a barrel, and Origin was expected to make billion of profits not just from its oil assets but its 37.5% share in the Australia Pacific LNG project.
Unfortunately for Origin, it had taken on too much debt to fund its share of the project, the oil price crashed down 70%, and the company was forced to raise billions in equity to prop up its balance sheet, and sell its 53% interest in New Zealand company Contact Energy for net proceeds of NZ$1.8 billion.
The falling share price meant Origin's market cap has also plunged significantly to $8.9 billion. Transurban's market cap is currently $22.8 billion.
Origin still faces a multitude of issues, particularly if the oil price remains under US$40 a barrel into the 2017 financial year. The company was forced to buy put options to provide a partial offset to any additional contributions Origin might need to make to the APLNG project if oil prices are under US$40 a barrel.
Rather than making billions of profit, the APLNG project may only just breakeven, with Origin estimating breakeven prices between US$38 and US$42 a barrel.
The other major issue is the company's level of debt. At the end of December 2015, Origin had $9.3 billion in net debt – which you may note is above the company's current market cap.
Foolish takeaway
Origin is a highly risky proposition currently unless oil prices regain and stay at a higher level – something which appears unlikely.
