A string of positive announcements regarding potential vaccines has provided a shot in the arm to the unloved energy industry these last couple of weeks.
The Origin Energy Ltd (ASX: ORG) share price has been among the winners and is up more than 30% since the beginning of the month.
That said, Origin shares are still down around 35% from pre-COVID levels, so there’s definitely a way to go from here.
ORG share price chart
Origin’s COVID-19 disaster
The energy sector is a tough place to be with many various factors affecting the profitability of the underlying business. Origin operates through two main segments: Australian energy retail and liquified gas (LNG) export.
Electricity and gas retailing in Australia have been relatively stable through COVID-19, with sales volumes nearly in line with prior years. The underperformance is the result of Origin’s LNG segment, which is ultimately dictated by the historically-low oil price.
As the world economy recovers and oil demand increases, the company should see a lift in sales as it can charge more for its oil and gas exports.
Is the Origin share price a buy today?
I think this would depend on your overall investment strategy. As a short-term play, I could see the appeal in trying to capture some of this remaining upside as global oil demand gradually picks up. I don’t personally know how long this will take, but some analysts have estimated that in the fourth quarter of 2021, Brent crude futures could average US$53.30 per barrel (currently US$46).
The recovery may indeed be faster depending on the success of potential vaccines, but it’s still not an area I would typically invest in, especially with a long-term investment horizon.
Over the last 10 years, Origin has struggled to achieve any significant sales growth and earnings have been volatile with a general downtrend. Return on equity has typically been quite low over the long-term, so it’s hard to see how shareholders are going to do very well if the business can’t generate substantial returns from contributed equity.
Buy/hold/sell
I wouldn’t be a buyer of Origin shares at the moment. I’d rather invest in a business where the macroenvironment works with the company rather than against it.
One ASX share I’m really liking at the moment is Infratil Ltd (ASX: IFT). Infratil is an infrastructure investment company with some nice macro tailwinds that should give it a nice boost in years to come.
If you’d like to know more, check out my in-depth article on Infratil shares.
