About: Origin Energy is an integrated energy company focused on gas and oil exploration and production, power generation and energy retailing in Australia. Its key operating segments include oil & gas exploration and production, LNG operation, energy retailing and power generations. The company has recently flagged the sale of their conventional gas business Lattice Energy with the proceeds used to pay down debt and fund ongoing capex. Origin also has renewable energy assets across solar, hydro and wind. Origin will predominately comprise of two main operating units: Energy Markets (energy retailing and generation) and Integrated Gas (LNG via Origin’s 37.5% stake in the Australia Pacific LNG venture).

Why it is in the portfolio: Origin provides investors with exposure to one of Australia’s largest energy retailers and exposure to LNG operations.

Fundamentals: Origin’s foray into the APLNG venture, in hindsight, was a costly venture and has resulted in asset write downs, an increase in debt and given low oil prices, lower than anticipated earnings from the APLNG asset. As a consequence, in recent years Origin has actively been working on paying down debt via non-core asset sales and a suspension of the dividend. Origin’s earnings were impacted in FY2016 predominately by a write down across some of its gas assets and with low oil prices earnings from the gas operations were a drag on earnings. However, earnings improved in 2017 on the back of operational improvements and increasing energy prices. Based on consensus forward earnings, Origin currently trades on a price-to-earnings ratio of around 15x, however earnings are leveraged to oil and gas prices, so should oil and gas prices improve their may be some upside to earnings in future years. In addition, management has been working on divesting non-core assets, managing costs and streamlining the business which based on consensus earnings estimates should underpin an improvement in earnings for future years.

What could go wrong: While the energy retailing side of the business provides relatively stable cash flow, Origin’s stake in APLNG means that the prospects of Origin are still leveraged to the price of oil and gas. While management are taking active steps to reduce the debt profile, we note that Origin still has a high level of debt. Government regulation/intervention could pose a risk for this business given the political focus on energy prices.