Origin buys more gas

With the colossal APLNG project still under construction, we expected little news from Origin Energy. Instead, Origin has announced the purchase of a 40% stake in the Poseidon gas field, off the Western Australian coast, for US$800m from Karoon Gas.

Origin will pay US$600m upfront to Karoon, with a further US$200m if the field meets performance hurdles. Origin signaled it would raise $1bn in equity to fund the purchase but, with both PetroChina and ConocoPhillips holding pre-emptive rights on the field, a deal is no certainty. Details of the capital raising will be released in coming months.  

Some may think the purchase reckless. Origin already has its hands full completing APLNG and its core energy retail business has deteriorated markedly. Yet APLNG should generate an additional $1bn a year in free cash flow when completed in 2015, creating a big war chest. That Origin is willing to deploy cash now suggests confidence in the success of APLNG. We are pleased to see cash being reinvested at (potentially) decent rates of return. There are plenty of development options for Poseidon, the most attractive being as feedstock for the Darwin LNG plant. That will require little spending but deliver a generous annuity. A Floating LNG development project is also possible.

Origin argues that discovery costs have soared, especially in Australia, making buying gas cheaper than finding it. This differs from the approach taken by Woodside Petroleum so it will be interesting to observe the trajectory of these two businesses. The price paid by Origin appears reasonable and, at under US$3 a barrel of oil equivalent, cheaper than PetroChina paid for its stake in the same field.

Origin spent a long time on our buy list and, if the price falls further, it may get back there. For now, with the share price steady since Origin Energy: Interim result 2014 (Hold – $14.66), HOLD. 

Note: Our model Growth Portfolio owns shares in Origin Energy.