It’s been a challenging year for Origin Energy Ltd (ASX: ORG) and its share price isn’t too far off where it was 12 months ago now.
Shareholders were dealt another blow today when the company released an update on its FY21 guidance which caused shares to fall over 8.5%.
Origin share price
Costs higher than normal
Origin’s downgrade has been the result of a price review for gas that was purchased from Beach Energy’s Otway Basis fields. Through an arbitration process, it was determined that the new gas price is likely to be significantly higher than the company’s original expectations and recent comparable wholesale contracts.
Based on this, Origin’s cost of supply is expected to increase between $30-40 million for FY21, which will increase further to $60-$80 million in FY22 as expected volume also rises.
On the matter, Origin CEO Frank Calabria said “We are disappointed in this decision which we believe is wrong, and entirely inconsistent with our prior experience in the gas market. This will result in a gas price that does not reflect market prices, and it is therefore a very poor outcome.”
Origin downgrades guidance
The recent gas price review will have a material impact on the company’s financial results.
Origin has updated its FY21 guidance and now expects earnings before interest, tax, depreciation and amortisation (EBITDA) to be in the range of $940-$1,020 million.
However, it’s not just this price review that’s caused Origin to struggle over the past year.
One of the main problems is that COVID-19 has significantly lowered the demand for energy, which has driven wholesale prices down, as well as a lower than expected contribution from Octopus Energy – a UK-based energy retailer that Origin has a 20% stake in.
Future outlook
Management believes a reduction in forward electricity prices and a mostly fixed cost base will mean that conditions will remain challenging into FY22.
Profit in natural gas is also expected to fall due to higher than normal procurement costs, price reviews and lower volumes as well as prices on commercial and industrial sales, which reflect the subdued market conditions.
Are Origin shares a value play?
Origin’s shares certainly look cheap compared to where they were prior to COVID-19, but it’s still not enough for me to what to become a shareholder at these levels.
I could partially see the appeal of a medium-term trade as trading conditions gradually improve, but as a long-term investor, I struggle to see the appeal in a capital-intensive business such as this and how it would align with my own and the Rask investment philosophy.
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