Origin Energy
Recommendation
Origin Energy has always insisted it would find buyers for output from the colossal Australia Pacific LNG (APLNG) project and, yesterday, it did just that. Sinopec has agreed to buy a further 3.3m tonnes per annum (mtpa), enough to underwrite the long-awaited second train of the project. The agreement is non-binding at this stage, so it’s far from a done deal; Chinese energy companies have signed non-binding agreements before, only to back out down the track. But it is evidence that the current controversy over coal seam gas (CSG) extraction hasn’t dented buyer enthusiasm. Along with the output from the project’s first train, Sinopec may buy as much as 7.8mtpa of LNG for 20 years, a commitment worth close to $200bn.
There remains some suspicion about the rate of return APLNG will achieve, especially from the initial single train. We suspect the returns will be higher than many expect. Origin was the first to peg CSG ground and has access to the highest quality, lowest cost assets in the industry. It should comfortably exceed the returns made by other upcoming LNG entrants, including Woodside’s Pluto project.
Sinopec will also increase its equity in the project from 15% to 25%. It’s unclear how much this will cost, but Origin has hinted a figure in line with previous equity sales, suggesting a price of about $1bn. Origin’s share of APLNG will now fall to 37.5%, reducing subsequent capital expenditures. The company's share price has fallen slightly since Slowly begins the gas boom from 16 Nov 11 (Long Term Buy - $14.58) and it remains a LONG TERM BUY.