Can Origin Energy Release The Kraken?

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The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Origin Energy’s valuation potential rests to a great extent on the possible demerger of Kraken from minority-owned Octopus Energy. But as to when this might happen is unclear.

-Focus on de-merger of Kraken from Origin Energy’s minority-owned Octopus Energy
-The if/when scenario remains unclear
-Analysts split on energy market and APLNG outlooks
-Origin released in-line FY25 result, share price rallied

By Greg Peel

In early July, the share price of Origin Energy ((ORG)) shot up on press reports Octopus Energy was seeking to de-merge its Kraken Technologies business.

Origin Energy is an Australian integrated energy company providing power generation, energy retail, and natural gas production. Octopus Energy Group is a UK-based, global clean energy technology business, driving the renewable energy transition. Origin owns 22.7% of Octopus. Octopus owns Kraken, a global customer management SaaS platform.

Analysts agree a de-merger of Kraken from Octopus would drive considerable valuation upside for Origin. The Octopus Energy retail business now has around 14m customers, with the Kraken platform now boasting 74m customers around the globe, noting the aim is for 100m accounts on the platform by 2027.

Heading into, and out of, Origin’s FY25 result release in mid-August, the five brokers monitored daily by FNArena covering Origin Energy were split into two Buy or equivalent ratings, two Hold and one Sell. While analysts assessed the performance of Origin’s Energy Markets business and APLNG gas production and guidance, a Kraken de-merger was front of mind with regard potential upside.

Morgan Stanley (Underweight) continues to prefer energy markets rival AGL Energy ((AGL)) over Origin Energy, on which it has an Equal-weight rating, based on forecast total shareholder return upside.

However, while Origin is less preferred by Morgan Stanley within the peer group on valuation grounds, the broker acknowledges a potential Kraken monetisation remains a key risk to its Underweight thesis.

Will Kraken Wake?

Last week UBS released a report suggesting Origin’s stake in high-growth utility Octopus Energy can provide the company with a number of positive catalysts and valuation support over the year. As Octopus’ Kraken platform accelerates its global licensing growth, UBS believes the risk/reward for Origin shareholders is “compelling”, with risk skewed 4 to 1 to the upside.

UBS sees potential catalysts providing market implied valuations for both Octopus and Kraken — initially via full financial separation and, “if press reports come to fruition”, possibly via an IPO of Kraken.

The broker values Octopus (Retail) at $1.10 per share and Kraken at $1.71, however, UBS’ upside scenarios could add a further $2.70 per share net to Origin.

Origin remains UBS’ (Buy) most preferred Australian Utilities exposure.

The aforementioned press reports suggested back in July that Octopus Energy is considering spinning off Kraken “within the next year”.

At the conference call following Origin’s FY25 result release in August, Origin’s CEO said:

“We’re focused on the separation of those businesses, which leads to choices and opportunities. We will assess investments based on the best choices for allocating capital. If Kraken becomes a separate entity, it will present choices, and we’ll keep the market informed. It’s early to predict how we might realise value, but we’re supportive of the separation.”

In its result assessment, Ord Minnett (Hold) noted Origin is suggesting extra funding over several years may be needed to provide the foundation for earnings growth before a separation of the Octopus and Kraken businesses, with the mooted Kraken IPO, which would provide a capital return to Origin, being several years beyond that.

Which brings into question Octopus’ suggestion it is considering spinning off Kraken “within the next year”.

Not All About Octopus

Much attention rests around Octopus Energy, Macquarie noted in its Origin result assessment. One-offs in FY25 meant Octopus’ performance fell short of expectation, but fundamental drivers in profit per retail customer and Kraken’s annual recurring revenue per customer grew.

Conversion of Kraken to a separate entity is the focus, Macquarie noted. The timing of separation/capital raise is significant, with separation first, then capital raise providing Origin the decision to grow its interest in Octopus.

Macquarie also believes Origin’s valuation looks to be pricing much of the Kraken IPO into the share price already, when core assets like Energy Markets and the APLNG valuation outlook appear flat. To that end, Macquarie retains Neutral on Origin.

Citi’s view nevertheless is that Origin is well positioned to benefit from volatility through the energy transition. As coal power assets are retired from the National Energy Market and we see a higher mix of variable renewable energy, Origin’s portfolio of gas peakers and battery assets should capture the value of price volatility, Citi believes.

APLNG is a worldclass LNG project, Citi notes, and produces above nameplate capacity with sufficient 2P reserves to cover LNG sales & purchase agreements beyond 2035.

Citi is “optimistic” on the growth trajectory of Octopus and its flagship Kraken platform, seeing value accretive potential of further leveraging this software in both the Octopus business and with Origin in Australia.

Citi expects this would reduce the cost to serve customers, maintain customer satisfaction, reduce churn levels, and optimise portfolio load, reduce market procurement costs, and maximize shareholder value.

Citi is the other broker with a Buy rating.

While brokers are split on their outlooks and ratings for Origin Energy, with Kraken separation/IPO perhaps vague at this point, rival AGL Energy is rated four Buys or equivalent, following two post-result upgrades, and one Hold (Morgan Stanley) by the same five brokers.

For additional context: AGL Energy was subjected to one of the eye-catching punishments in August with management’s outlook triggering a reset in shorter-term forecasts.

The sell-off in AGL shares aided the two upgrades to Buy, as brokers saw the reaction as overdone, pointing to upside from AGL’s battery investment over the longer term.

Origin’s share price jumped on its result release, although analysts saw a largely in-line performance.

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