Origin Energy's 2013 AGM

Origin Energy’s annual general meeting was a sentimental affair this year, being the last for outgoing chairman Kevin McCann. Together with chief executive Grant King, McCann has run the company since it was spun out from Boral in 2000. So when McCann announced his retirement earlier in the year, there was speculation that Grant King, whose contract expires in 2014, may do likewise.

It was not to be. King has signed a new contract with Origin and will remain CEO for an indefinite period. Like most investors, we’re happy to see King carrying on. With an unrivalled knowledge of the industry, he has overseen shareholder returns of 22% per year for 13 years, one of the best records on the market. The new chairman will be long-time director Gordon Cairns.

It has been a difficult year for the company, with the energy retailing business reporting a fall in operating profits for the first time. Important industry shifts – sustained lower electricity demand and heightened competition – are to blame. We have written extensively about the challenges to that business and recommend reading Origin Energy under siege part 1 (Long Term Buy – $10.25) and part 2 (Long Term Buy – $10.63) for more detail.

There is no respite from those problems, with Origin declaring that unseasonably warm weather will result in yet lower electricity volumes which are likely to reduce profits for the full year. Origin has at least stopped bleeding customers to rivals – although, as we noted on 22 Aug 13 (Buy – $12.98), keeping them comes at a cost of lower margins.

There was better news from the Contact business which, after years of heavy investment, is finally generating the desired returns. Investor focus was, as ever, on the LNG business which is progressing as expected.  

In a retrospective moment, Kevin McCann spoke about the pressure the company faced in the 1980s and 90s when it built a large land position in Queensland with hopes of producing coal seam gas. Everyone counselled against it but Origin proceeded nevertheless. We all know what happened next.

The resulting LNG project, APLNG, is now 45% complete but will continue to consume cash over the next two years. Once APLNG is complete, capital spending will dwindle and free cash flows will rise substantially. Although difficulties remain in the retail business, scepticism over APLNG is slowly dissipating. Origin’s share price is up 11% since 22 Aug 13 and, although it is on a cusp of a downgrade, we wont quibble over a few cents and will stick with BUY for now. 

Note: The Growth portfolio owns shares in Origin Energy.