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Origin Exits Gas for Clean Energy

ESG Focus | Sep 21 2022

This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG

With divestment of its Beetaloo asset stake, Origin Energy continues its transition away from gas exploration. While largely received positively by analysts, some raise concern as to the pathway towards energy transition exposure.

-Origin Energy has confirmed the sale of its Beetaloo Basin interest
-The sales comes amid the company’s strategy shift to improve exposure to the clean energy transition
-Reducing capital expenditure requirements and ESG-risk, the sale was largely regarded as positive by analysts

By Danielle Austin

Continuing its shift towards the clean energy transition, and away from gas exploration, Origin Energy ((ORG)) has announced the impending sale of its 77.5% Beetaloo Basin interest  to Tamboran Resources ((TBN)) for $60m.

The Beetaloo Basin asset is held by a joint venture between both Origin Energy and Falcon Oil and Gas, with the sale following an eight year exploration campaign by Origin Energy in the region.

As per conditions of the sale, Origin has retained a gas sale agreement for offtake of future gas production at Beetaloo. This will see Origin receive a 5.5% royalty on future production from the asset, should Tamboran Resources make a final decision to proceed to development. The agreement covers up to 36.5 petajoules over ten years, with analysts expecting production at Beetaloo won’t occur for several years.

Origin Energy will retain its Cooper-Eromanga and Canning exploration assets, although is expected to divest the remainder of its non-APLNG assets over time in continuation of its energy transition.

Reducing ESG risk and valuing Beetaloo

The ongoing move towards assets providing exposure to the energy transition reduces Origin Energy’s gas development ESG risk, and associated increasing capital costs.

Outside of FNArena's daily coverage, Jarden (Neutral, target price $5.65) reported on Origin’s announcement. The sale of the Beetaloo interest for $60m represents a -$195m miss to Jarden’s valuation of $255m for the asset.

Given the early stage of Origin's other exploration assets, they are yet to contribute to the broker’s valuation of the company. Divestment of these remaining assets would free up $60m in capital expenditure annually, potentially being redirected to clean energy investment, suggests the broker.

Within database coverage, Morgans, Macquarie and UBS all updated post the announcement. Two of these are equivalent Buy rated, with only Morgans on Hold. These three brokers have an average target price of $6.82, with a range of $5.70-7.42.

Macquarie (Outperform, target price $7.42) described the timing of the company’s strategic shift as disappointing given Origin Energy’s investment in Beetaloo, Cooper-Eromanga and Canning over 2019 and 2020, though this broker found the sale and exploration exit positive.

The broker expects Origin remains committed to a further -$40-60m in investment costs at Cooper-Eromanga and Canning. Macquarie estimates a decline in annual integrated gas internal costs of -$20-30m without Beetaloo. Improved cash flow should be able to fund investment in later years, or fund increased dividends.

Finding Beetaloo to be Origin’s most prospective exploration asset, Morgans (Hold, target price $5.70) expects any upside from remaining assets to be minimal. This broker does not account for Cooper-Eromanga or Canning in its current valuation.

According to Morgans, the benefit from Beetaloo if developed could be significant to Origin. The broker does warn, at minimum, the project would be several years from delivering royalties, with Tamboran Resources’ modest cash balance potentially unable to immediately fund the project. The broker remains unclear as to Origin Energy’s path as an energy retailer.

Supportive of Origin Energy’s strategic focus on allocating capital on improving its energy transition exposure, UBS (Buy, target price $7.35) expects divestment of Origin Energy’s remaining non-APLNG assets in the Cooper-Eromanga and Canning basins could be valued at $130-160m.

UBS finds Beetaloo one of Australia’s largest and most interesting gas resources, and expects royalties from development could provide a 20 cents per share valuation boost.

FNArena's consensus target of $6.48, derived from six brokers monitored daily, suggests potential upside of more than 12% from today's share price with prospective dividend yields currently at 5.7% and 5.8% respectively for FY23 and FY24.

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