Origin Energy Ltd
Security price: $12.33
Industry: Energy
Forecast distribution: 50c per share

Australians are getting grumpy with rising energy prices, and increasingly looking around for better deals: intense competition, and the maturing of the energy market, is affecting Australia’s biggest energy retailer, Origin.

But Origin’s part-owned Australia Pacific LNG project (APLNG) should trigger earnings growth in the next few years as production begins, and offset that lower growth from energy.
The project should also bring about a big increase in the company’s dividend yield in coming years, which makes it an attractive option for income investors.
Origin is one of Australia’s leading integrated energy companies with operations spanning energy exploration, production, power generation and retailing.
With 4.3 million customers, Origin is Australia’s largest energy retailer. But, as mentioned, that energy business is operating in a maturing, lower-growth and more competitive market.
That has affected Origin’s earnings. Excluding one-off items, Origin’s most recent ‘underlying’ interim profit fell 9 per cent to $346 million. But the company is completing its APLNG project, in which it has a 37.5 per cent interest, and will start production in the first quarter of the 2016 financial year.
APLNG is Australia’s largest coal seam gas (CSG) to liquefied natural gas (LNG) project and is 90 per cent complete. The project has locked in 20-year supply contracts with giant Chinese and Japanese power companies.
There are still some execution risks around APLNG but after this year Origin’s capital spending will fall significantly. That will boost cashflow and should allow a big rise in dividend payments from 2016.
A steady increase in the price of oil from recent lows, coupled with depreciation of the dollar, would also effectively increase distributable cashflow for Origin in the next three to five years.
Origin declared an interim unfranked 25c per share dividend. The company is forecast to make a total full-year dividend pay out of 50c per share, unfranked, which gives a solid 4 per cent dividend. But Origin intends to maintain dividends at more than 50c per share, or a minimum 60 per cent payout ration as earnings grow following the completion of its investment in APLNG.
At $12.33, Origin is trading slightly below our value of $12.95.