Energy

Origin Energy pulls guidance amid heighted uncertainty around earnings outcomes

Wed 01 Jun 22, 3:18pm (AEST)
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Key Points

  • Origin slashes FY22 earnings expectations and abandons guidance for FY23
  • Forced to make replacement coal purchases at significantly higher prices
  • Consensus on Origin is Moderate buy

Origin Energy (ASX: ORG) shares were down -16.57% to a new 2-month low of $5.71 after slashing the energy markets earnings forecast for FY22 by a quarter and abandoning its guidance for FY23.

The energy giant revised underlying earnings to be between $310m and $460m – previously $450m-$600m – after warning that material developments in global and Australian energy markets have created a high degree of uncertainty around the range of earnings outcomes for FY23.

Underscoring the earnings downgrade is huge volatility in electricity markets and a litany of coal supply issues at Eraring, Australia's largest coal station, which its plans to shut as soon as mid-2025.

Production constraints

Due to production constraints experienced by the company’s supplier, Centennial Coal, Origin has been exposed to replacement coal purchases at significantly higher prices.

"Despite positioning the year with a relatively low short position across all states, the lower output from Eraring results in a greater exposure to the purchase of electricity at current high spot prices in order to meet customer demand," Origin noted.

While deliveries from Centennial Coal’s Mandalong mine are expected to be interrupted throughout FY22 and into the first half of FY23, equipment supply chain delays – affecting additional supplies by rail - are also expected to impact coal deliveries in FY23.

FY23 guidance withdrawn

However, with Origin's gas business on a tear, group underlying earnings are forecast at the mid-point of the original $1.95bn $2.25bn range, with integrated gas earnings expected to between $1.7bn-$1.8bn, up from the original $1.5bn-$1.65bn range.

Origin had previously provided guidance for Energy Markets Underlying earnings for FY23 of $600m – $850m.

However, due to a high degree of uncertainty around the range of earnings outcomes for FY23, Origin has withdrawn all guidance for FY23.

Meantime, management will continue to assess the outlook, and plans to provide an update at full year results in August.

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Origin Energy share price: A 12 month snapshot.

What brokers think

Consensus on Origin is Moderate buy.

Based on Morningstar’s value of $6.76 the stock appears to be undervalued.

Based on the six brokers that cover Origin (as reported on by FN Arena), the stock is trading with 17% upside to the target price of $6.73.

Broker valuations vary between Morgan Stanley’s $6.06 (25/03/22) and UBS’s price target of $7.70. (05/05/22).

While the broker retains a Buy rating, it expects earnings per share (EPS) to fall over the next three years as coal prices ease.

While coal costs remain an uncertainty, Macquarie expects gas to provide upside for Origin, and retains an Outperform rating, with the target price increasing to $7.32. (27/05/22).

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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