Shares in Origin Energy Ltd (ASX: ORG) have hit a new 52-week high of $7.20 this morning. Although a far cry from the $13 seen as recently as mid-2015, today's price represents a significant recovery from lows of $4 a year ago.
Shares are up on higher oil prices, as well as news that Origin will spin off its non-core assets into a separate company. As I said at the time, the proposed spin-off company appears more interesting than debt-burdened Origin.
In fact, with Origin's share price at its highest point all year, if I was a holder I might be more inclined to sell than to buy more. The company still carries $9 billion in debt, and it'll be selling off some of its most promising prospects, including the Waitsia and BassGas fields soon.
That will reduce the debt burden, and a more focused and less indebted Origin will be in a better position to generate improvements from its APLNG plant and electricity retailing business. Also, the current higher oil prices will boost the company's cash flow and a temporary decision to cancel the dividend can't hurt.
Yet I'm thinking that much of the potential benefit of these measures is already factored into Origin's share price. Further earnings growth requires higher oil and gas prices and/or an increase in profitability as a result of lower interest expenses, the addition of a second train to APLNG, or similar. At today's prices and with a market capitalisation of $12.6 billion, Origin is valued at around 35x last year's underlying earnings.
That's too much to pay in my opinion, and the possible upside in my opinion isn't more than 20% to 30% in the next 1 to 2 years. I think it more likely that Origin shares will trade sideways over that time. I just don't see much of an opportunity in the company today.
