Origin Energy has been the strongest major oil and gas stock in the market over the past three years, moving from its $1.20 low to a $4.53 record high over the period.
Price movement
Origin Energy has been the strongest major oil and gas stock in the market over the past three years, moving from its $1.20 low to a $4.53 record high over the period. The beginning of the ascent coincided with its demerger from Boral.
Profile
In February 2000, Boral shareholders approved the demerger of the energy business from the building and construction materials business, and the new energy company became Origin Energy. Origin is involved in oil and gas (LPG and natural gas) production and exploration, retail gas reticulation and power generation. It supplies more than two million customers with gas and electricity. The majority of its exploration projects are in Australia, but it also has projects in New Zealand and the US (in the Gulf of Mexico).
Origin took over Oil Company of Australia in September last year. In 2001 it increased its customer base and electricity retailing capability with the acquisition of the Powercor electricity retail business in Victoria. It acquired CitiPower last August. Powercor and CitiPower have a 20 per cent share of the Victorian market.
Current details
Origin announced a 26 per cent increase in net profit (after adjustments) of $162 million for the full 2003 year, on the back of a 38 per cent increase in revenue to $3.4 billion.
Origin's growth continues to focus on building its existing businesses and making acquisitions. It has a 30 per cent debt-to-equity ratio, so further acquisitions are well within its power. Next year's forecast earnings are expected to be about $180 million, placing it on a prospective P/E of 13 to 13.5 times, but it has a low dividend yield of 2.6 per cent.
The Bass Gas joint venture (38 per cent Origin) is expected to commence production in July next year, and the Otway Gas Project (30 per cent Origin) should be online by mid-2006. Both will contribute to future earnings.
Sector
Woodside Petroleum ($6 billion market capitalisation) and Santos ($3.4 billion) are Origin's ($2.8 billion) major listed energy index competitors. However, Origin's mix of retail and energy generation makes it more comparable to the utility company Australian Gas Light. AGL shares sell on a 14.5 times P/E, making Origin better value, although with a lower dividend yield. The recent announcement that the US utility company Texas Utilities will sell its Australian assets may see some opportunities for the likes of AGL and Origin.
Worth buying?
Origin Energy continues to manage its future development well. However, with earnings growth slowing over the next year, it is likely the share price will consolidate at these levels, especially with its low dividend yield. Origin will suit investors patient enough to buy on price weakness of about $3.80.
Geoffrey Hill is presenter of ABC NewsRadio's daily afternoon finance report and is an independent private client adviser. Visit him online at www.ghill.com.au
