Australia | Sep 16 2008
This story features ORIGIN ENERGY LIMITED.
For more info SHARE ANALYSIS: ORG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
By Andrew Nelson
The last nine months have been a hell of a ride for Origin Energy ((ORG)), but with the share price going from the $9 dollar range at the beginning of the year to over $16, most investors will be glad they held on for it.
It’s still a long way to go before the price makes it to the $30 target that a recent independent expert report has set.
Recent history starts in February, when AGL Energy ((AGK)) made a play for the company, but in March Origin knocked back the $7.5 billion dollar deal, saying it didn’t sufficiently value its integrated model and in specific, saying it ascribed little value to its coal seam gas (CSG) assets. This “integrated model” talk becomes a common theme in management’s justification to the market in the months to come and CSG becomes its key in valuing the model.
Origin is unique among its Australian utility peers as it is as much of an energy play as it is a utility company, with the company involved in the entire chain of energy supply to consumers. It undertakes gas and oil exploration, production, energy retailing and power generation.
The problem, as Origin saw it, was that the market was ready to ascribe value to the energy retailing and power generation aspects of the business, but not to the exploration and production side of the business, making it an $8 to $9 stock. And when you’re sitting on what ends up being a lot more than $9 billion worth of CSG, and you know you are, this is a big problem.
While there were a few sore heads after the AGL deal fell apart and quite a few commentators asking questions about MD Grant King’s handling of the negotiations (or seeming lack thereof) shares were pretty quickly back above $9, with little harm coming from the endeavour. Investors were starting to come around to the integrated model way of thinking.
The next bid came from BG Group in May, and as an oil and gas explorer, it did ascribe some value to the gas and oil exploration end of Origin’s business. But the $14.70 per share just wasn’t enough, said Origin. Within a month the offer was up to $15.50 and again the market was starting to grumble about King’s seemingly lackadaisical approach. Surely he’s got to jump on it, or risk the share price falling back to the $10 level it was at before the BG approach…
Remember, King has been at the helm for more than 8 years and he is the architect of the integrated model. If anyone knew what Origin was worth, it was he.
That’s when lightning struck, for the first time. Global energy giant Petronas signed a joint venture deal with Australian gas major Santos and the deal was for major CSG development. It set a much needed benchmark for prospective CSG developments and implied a much higher value to the reserves Origin was sitting on.
With these numbers in hand, BG’s offer was dismissed in May and while the global player kept nipping at the target’s heels, raising the offer incrementally, Origin now had the prospect of a CSG jv to chase. It told BG that it wouldn’t agree to anything until an independent expert could verify the value of the company, including its CSG holdings,
Grant Samuel’s Independent Expert valuation on the company came out, and it set a value of between $28.55 and $30.71. While BG scoffed at the valuation, it freed up King to look around and see if any CSG jvs were on offer.
Then lightning struck for the second time.
Last week, US energy giant ConocoPhillips took a 50% interest in the group’s coal seam gas assets in Queensland for around $9 billion. Just eight months ago AGL wanted to buy the whole company for $7.5 billion. Hah!
And it’s not a pipe dream for Conoco, who has previous experience in developing CSG assets.
Sure, BG was right in saying that the CSG end of the business was a bit speccy, but now the company has more than $9 billion in the coffers, a 50% share in the upside, a cashed up partner who knows what it’s on about and the coal seam gas development discussion has gone from speculative exercise to a lucrative certainty.
The only question now is: how much is certain?
Broker’s have been unanimously positive in their reactions to the ConocoPhillips deal, with the average target price shooting to $20.82 on the FNArena database and the sentiment indicator at 0.7, take out Deutsche Bank and Credit Suisse, who are restricted because of the corporate services they are providing to either Origin or ConocoPhillips and the sentiment indicator would be at a near perfect 0.9. Only UBS remains Neutral at this time, but it says it is reviewing its view.
Even so, a $16.40 share price and a $20.82 target accompanied by near unanimous accolades is still a far cry from the $28 to $30 that Grant Samuel was calling for. In fact, it looks like the only ones that are buying into these numbers are Origin, ConocoPhillips and Grant Samuel itself.
So why the divergence? Simply put, it comes down to getting CSG production on-line, which remains a complex and expensive undertaking.
The expert’s price and ConocoPhillips’ offer call for four LNG trains to be brought into production. Right now, the consensus of broker opinion is only pricing in one. Until these trains are built, most of what Origin is sitting on is still just potential, in the market’s view.
An LNG train is a facilitiy used to cool and so reduce natural gas to a volume that makes it easy to transport from one area to the next. It includes both liquefaction and purification facilities and the more gas a company has to process the more trains it needs, hence the market is waiting to see how Origin goes with the first one before fully valuing the company for the prospect of additional trains in the future.
Merrill Lynch thinks the upside from delivering a second LNG train is worth $3.05 per share and with the company already having added 5,500 Petajoules to its 3P reserves this year, it should have enough reserves to justify a second train by the end of FY09. JP Morgan’s two train valuation is $25.84 per share, with the broker suggesting this implies significant share price upside from current levels.
Four trains is starting to look pretty good.
Origin is also planning to reward shareholders with a $1.275 billion buyback, using some of the ConocoPhillips proceeds, which should help boost the share price in the nearer term.
Until then, four trains may be a long way off, but there seems to be a lot of upside from where the stock is at now.
At 1438 AEST, shares in Origin Energy were trading 25c, or 1.5% lower at $16.36, well ahead of the 2.4% the broader market is down . This compares to a 12 month trading range of $7.650 to $19.99.
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