Origin Energy

Origin Energy’s share price has slumped 9% since 05 Jul 12 (Long Term Buy - $12.74) and 17% for the quarter. For a relatively stable energy retailer this is a noteworthy decline but two issues are behind it; one has to do with Australia Pacific LNG (APLNG), the other the energy retail business.

The market has judged that costs at APLNG will be higher, and production rates lower, than predicted. Both these judgements have been made following announcements from Origin's peers. Woodside, Chevron and others have reported higher LNG developments costs while coal seam gas producers such as Santos and BG have reported unexpectedly low rates of flow. None of these woes have yet affected APLNG. Apart from currency fluctuations, costs are within budget and flow rates remain strong.

A more immediate concern lies in the energy retailing business. In Queensland, Origin has been forced to reverse price increases after intervention from the state government. Regulatory risk has risen unexpectedly. If Origin cannot recoup higher energy and distribution costs, returns in the future will be significantly lower than in the past. It's a development to watch and it has been behind a slight lift in the risk ratings.

Despite recent price falls, we’re electing not to upgrade to Buy or to increase portfolio limits. While Origin remains attractively priced (an issue that will be fleshed out in a forthcoming review), this isn’t a recommendation suitable for a big swing. Inconsistent production data from fellow coal seam gas projects makes it clear that risks in this infant industry remain high. We'll wait for more production data before revisiting a possible upgrade. Until then, Origin remains a LONG TERM BUY.