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Oil surge boosts Origin recovery

Lex Hall  |  10 Jul 2018Text size  Decrease  Increase  |  
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A surge in oil prices has reversed the fortunes of Origin Energy, which Morningstar estimates will boost its profits by more than 20 per cent in 2019.

Morningstar has increased its fair value estimate for no-moat Origin (ASX: ORG) by 7 per cent to $8, although it maintains its view that the energy retailer is overvalued.

In his latest update, Morningstar equity analyst Adrian Atkins says a 60 per cent surge in the oil price over the past year - nearly tripling from the early 2016 lows - has boosted Origin's Australia Pacific LNG export site.

"In hindsight, we went bearish on Origin Energy too early. But oil price volatility was all on the upside," Atkins says, noting that the APLNG site, of which Origin owns 37.5 per cent, has gone from "barely breakeven a year ago to making copious free cash flows".

Morningstar has increased the oil price it uses in its forecasts for the next few years, and has upgraded Origin's net profit after tax forecasts by 4 per cent in fiscal 2018, 26 per cent in 2019, and 9 per cent in 2020.

"Our longer-term earnings forecasts are not materially changed," Atkins adds, "being based on our unchanged long-term oil price forecast of $60 per barrel, growing with CPI."

gas energy Origin Energy

'Origin’s credit metrics now don't look too bad,' says Morningstar

Buoyant oil prices will boost Origin’s cash flows and help pay down debt, Atkins says, following the large amounts it borrowed to build APLNG, which came online in mid-2016.

"The recent oil price rally has helped hugely, and Origin’s credit metrics now don't look too bad," Atkins says.

Morningstar forecasts proportional net debt/EBITDA of 2.3 times in fiscal 2019, which is comparable with AGL Energy and New Zealand generator-retailers.

Morningstar's FVE for no-moat Origin increases 7 per cent to $8 per share on the assumption of stronger near-term oil prices. Energy is currently trading at $10.17, a 27 per cent premium to the $8 FVE.

This implies a a forward fiscal year enterprise value/EBITDA of 7 times and a P/E of 14 times.

"We assume dividends start in fiscal 2019 at a conservative level so retained earnings can help repair the balance sheet."


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Lex Hall is a Morningstar content editor, based in Sydney.

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