Upgrades Flow From Origin’s ConocoPhillips Deal

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            [3] => ((OSH))
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This story features ORIGIN ENERGY LIMITED, and other companies.
For more info SHARE ANALYSIS: ORG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

In a move that caught spurned suitor BG off guard, Origin ((ORG)) has signed a deal with US group ConocoPhillips that values its coal seam gas reserves at more than BG’s bid for the entire company was worth. The ConocoPhillips deal entails a $5.9 billion upfront payment for a 50% stake in Origin’s upstream business, $1.15 billion in carrying costs for further development and $600 million for each LNG train approved.

According to Merrill Lynch the deal, which in headline terms values Origin’s coal seam gas reserves at around $1.88 per Gigajoule, is somewhat misleading as it includes several different tranches and conditions. This means the real price is closer to $1.18 per Gigajoule, leading the broker to estimate an overall value in the range of $20.30 to $26.01 per share.

This compares to Grant Samuel’s Independent Expert valuation on the company of between $28.55 and $30.71.

JP Morgan’s valuation assumes a fourth train will be developed, putting it estimate in the range of $31.31 to $37.61 per share. This is where much of the valuation difference lies, as in Merrill Lynch’s view, the market at present is not likely to pay up beyond a single train given Origin’s current reserves. On this single train basis it values the stock at around $19.00.

JP Morgan’s 2 train valuation is $25.84, with the broker suggesting this implies significant share price upside from current levels. As a result, the broker has upgraded the stock to an Overweight rating compared to Merrill Lynch’s Hold recommendation.

Also supportive of JP Morgan’s rating upgrade is the fact the company has announced a special dividend of 25c per share as part of the deal, which the broker notes effectively doubles the FY08 payout and provides a base for future payout levels. In its view, the company is likely to pay around 60% of earnings out each year in the future compared to its historical payout ratio of around 45%. A share buyback worth $1.25 billion has also been announced and the broker sees this as also offering share price support.

What should help the share price further is the fact on the broker’s numbers the deal with ConocoPhillips is around 20% earnings per share (EPS) accretive in FY09 and 14% in FY10. The broker now forecasting EPS of 68.1c this year and 86.4c in FY10. In contrast, Merrill Lynch is forecasting EPS of 56.6c and 61.2c respectively, while ABN Amro is at 77.8c and 101.6c, having lifted its numbers to factor in the terms of the new agreement.

Like JP Morgan, ABN Amro has upgraded the stock to a Buy post the announcement, while expressing surprise Origin was able to secure such favourable terms from a global oil major. It suggests a counter offer from BG or anyone else is now unlikely, a view shared by JP Morgan.

The other surprise for ABN Amro was that the Origin share price didn’t rise further on the news, as on its numbers the current share price is reflecting a price of around 25c per Gigajoule of gas compared to the deal price of more than $1.00. As a result, it expects the market will eventually warm to the deal, which would mean further upside for Origin shares.

Overall, the FNArena database shows Origin is now rated as Buy four times and Hold once, with a number of brokers now restricted from making recommendations given their involvement in the company’s deal with ConocoPhillips. The average price target on the stock is $20.23, up from $17.66 prior to the deal being announced.

So what does the deal mean for the rest of Australia’s coal seam gas companies?

According to JP Morgan, the Origin deal gives the whole sector greater credibility, though it remains a case of buyer beware as reserves appear to be higher than some market research had previously expected and this should mean a softening of what is currently a very tight Asia-Pacific LNG market.

Specifically, the broker sees the deal as having little impact on the proposed schedules for either the BG/Queensland Gas ((QGC)) or Santos ((STO))/Petronas projects, both of which are further advanced than the Origin proposal. The Oil Search ((OSH)) LNG project in Papua New Guinea and the Queensland projects are seen as relatively low risk, in the broker’s view, while it is more cautious on projects in Western Australia given the potential for conflict between joint venture partners.

In stock terms, the broker prefers Queensland Gas and Santos, suggesting these stocks offer value in the sector at present, as both trade at a discount to Woodside ((WPL)) and also provide a good way to play the LNG market. Other brokers tend to agree, as Santos is rated as Buy six times, Hold three times and Underperform once, with an average price target of $24.39, while Queensland Gas scores a perfect three for three Buy ratings and has an average price target of $6.49.

Today, shares in Origin are down slightly and as at 1.25pm the stock was 8c lower at $17.57, while Santos shares were down 34c at $18.41 and Queensland Gas was 3c weaker at $4.77.

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