Origin Energy: Result 2012

Origin Energy’s reported net profit for the year rose 427% to $980m. As always, the statutory profit is of little use. This year's result includes movements in derivatives and gains from the part sale of Australia Pacific LNG (APLNG). On an underlying basis—a more accurate gauge of business performance—net profit was up a more sober 33% to $893m. From underlying earnings per share of 82.6c, up 16%, a fully franked dividend of 50c was declared (ex-date not yet known).  

Despite the surge in profits, investors focused on the last few minutes of Origin’s presentation, where Grant King cautioned that profits next year would be similar to this year. In other words, growth will slow to a trickle.

Being accustomed to profit growth of 10%-15% over the past decade, the declaration came as something of a shock. It shouldn’t have. Origin has grown profits in a tough business mainly by reinvesting capital. With all funds being funnelled into the capital hungry APLNG project, that growth record had to break, at least for a few years.

The good news is that APLNG, when complete, should generate excellent returns. Origin reconfirmed costs of about US$50 barrel of oil equivalent, including capital and operating expenses. For those bullish on oil prices, this remains a lucrative project that will jolt profits higher.

Of more concern are changes in the energy retail industry, where the threat of regulation by state governments grows and energy demand slows. As economic conditions deteriorate and more roofs acquire solar panels, retail energy consumption is falling. This is a reversal of a decades long trend in the opposite direction and it’s too early to tell whether it is temporary or permanent.

Operating cashflow grew 30% to $1.8bn but capital expenditure was higher still, at $2.4bn. While 2012 was the peak year for capital expenditure, it will remain high until APLNG is completed in 2015. As a consequence, Origin’s debt levels remain high but manageable; interest payments of $400m this year are well covered by cashflow.

Lingering suspicion over APLNG is being contradicted by facts; costs are contained and flow rates remain strong. A more detailed review will follow reporting season but with Origin’s share price up marginally since 30 Jul 12 (Long Term Buy – $11.61), we’re sticking with LONG TERM BUY.