Further broker updates: Bit of a mixed bag, but overall,...

Further broker updates: Bit of a mixed bag, but overall, brokers seem to have an outperform bias

Credit Suisse – TP $4.80

Get Kraken, upgrade to OUTPERFORM

• 4Q21: Company provides FY22 and FY23 Energy Markets guidance, FY23 midpoint 12% below consensus FY22, 10% above CSe. The 4Q21 production report was in line with forecast. However, Origin provided new guidance, for FY22 Energy Markets EBITDA of A$450-600mn vs Visible Alpha consensus A$711mn (CSe A$673mn), and FY23 EBITDA of A$600-850mn vs consensus A$819mn (CSe A$658mn).
• Energy Markets downgrade cycle complete if consensus converges to FY23 guidance, based on current futures (CSe remain below): We have long argued that consensus forecasts did not adequately reflect the fall in wholesale electricity prices since 2017. In our last update, we estimated that a further A$5/MWh rally in futures was needed to meet consensus FY23F. Since, futures have indeed rallied ~A$5/MWh, plus midpoint of guidance would see consensus forecasts decrease A$94mn, equivalent to another A$5/MWh. So, while we retain our A$55/MWh LT forecast which leaves us in the bottom half of FY23 guidance, we estimate that the current forward price of A$60- 65/MWh would deliver top half; so for the first time in years, the downgrade cycle relative to the current forward curve is complete.
• Trough earnings, material underperformance vs ASX200 and Brent, good FCF/div yield and balance sheet repair justifies rating upgrade: A FY22F standalone FCF yield of 17.2%, and dividend yield of 6.1% is good – but not standout- value, with the FCF yield in line with the Aus Oil & Gas peers. We expect utilities market conditions to continue to be difficult, though we asses that FY22 represents the trough. From here, positives include the fruits of the Kraken migration, Beetaloo commerciality, and the de-risking and optionality that will come with balance sheet repair.
• Increase target price to A$4.80/sh (from A$4.50/sh), upgrade to OUTPERFORM: We decrease Energy Markets FY22F EBITDA 19.4%, FY23F approx unchanged. Further, we incorporate raised CS global oil price forecasts, (near-term Brent +A$5/bbl, LT +US$2/bbl), which results in an increase to our DCF-based target price.

CLSA – TP $4.11

Stormy weather ahead - Sell

• Energy Markets to bottom in FY22 but APLNG may be at its peak

Energy Markets (EM) guidance for FY22was disappointing, but it probably represents

the low point for utility earnings.Current NEM forward prices indicate a modest

recovery in EM Ebitda in FY23 but onlyto half the FY19-20 levels. Despite the

severely challenged utility business,a strong oil price will rescue the group’s Ebitda.

APLNG’s Ebitda and distributionsshould soar in FY22 due to the slashing of Capex

and an oil price increase of almostUS$30/bbl. However its tax efficient distributions

will end soon. Conoco says APLNG’sbreakeven oil price will rise over the next decade,

and we think upstream Capex willstep-up in its middle-age as production transitions

to browner pastures. We trim our pricetarget 8%, from A$3.53 to A$3.26, and retain

our SELL rating.

• Negatives of the non-cash variety: A$1.8bn in impairments

Origin will impair A$0.8bn in powergeneration assets (particularly Eraring) and A$1bn

of goodwill related to long-term PPAsand lower gas earnings. This is mainly due to

lower NEM electricity prices, whichbegs the question: why not recognise it earlier? The

generation write-off should reduceD&A by A$70m and boost NPAT by A$50m.

• Energy Markets: the perfect storm in FY22 and the recovery will be limp

Guidance indicates EM Ebitda will fallfrom A$940m-A$1,020m in FY21 to A$450m-

A$600m (CLSA: A$552m) in FY22. Thedecline is due to A$20/MWh in lower electricity

prices plus higher gas/coal supplycosts, though is partly offset by targeted reductions

in the cost to serve (see our earningsbridge on page 4). For FY23, if improvement in

electricity futures prices ismaintained, its EM Ebitda will recover to A$600m-A$850m

(CLSA: A$722m). However this wouldonly be half of its FY19/20 level of A$1.5bn.

• APLNG: it’s all sunshine now, but a few clouds on the horizon

APLNG’s earnings will leap in FY22because its contractually-lagged oil price will

recover from US$43 to US$72 (CLSA).Its FY22CL Ebitda will rise by c.A$800m which

will outweigh weakness in energymarkets, and distributions will jump from A$0.7bn to

over A$1bn (CLSA: A$1.1bn) afterhedging. However, its MRPCS shareholder loans will

be redeemed soon and APLNG will payless tax-efficient ordinary dividends from FY23.

Conoco’s recent investor day suggestsits distribution breakeven oil price will rise from

under US$25/bbl today to US$30 in thenext five years and will be at least US$40 after

2025 (see page 9). In that light,perhaps Conoco would consider a sale?

• Retain SELL rating with a new price target of A$3.26

We trim our EM Ebitda forecast toreflect guidance which lowers our EM valuation 8%.

For APLNG, we boost Capex even furtherafter 2025 which reduces our APLNG

valuation by 1%. Our SOTP-DCF/multiplebased price target falls by 27cps to A$3.26.

This implies a -16% TSR over 12months, and thus we retain our SELL rating.

Goldman Sachs – TP $6.10

Origin Energy (ORG.AX): FY23 recovery underpins rising equityreturn; Buy

• Energy Markets FY22/23 guidance confirms FY22 trough: While we had expected FY22 to be an Energy Markets earnings trough on the previous outlook, Origin highlights that recent elevated coal and gas prices have led to higher than expected generation fuel costs in the electricity business. FY22 EBITDA is now expected to be lower at A$450-600mn (GSe A$558mn), but will be largely offset by increased earnings from APLNG. Origin also expect the outlook to improve from FY23, with a rebound of ~A$150-250mn to A$600-850mn (GSe A$821mn). Capital and operating cost savings and the introduction of the Kraken platform help further mitigate some of these impacts.
• 4Q21 operationally in-line: APLNG net production volume was ahead of forecast at 64.7PJ, with full year broadly in line with pcp. Sales volumes were also slightly ahead of expectations, offsetting softer realised pricing, with APLNG’s effective oil price in the quarter at US$51/bbl, up from US$44/bbl in 3Q21 and down from US$68/bbl in 4Q20. The FY21 distribution from APLNG of A$709mn was in line with expectations and above guidance of >$650mn, and is expected to rise to >A$1.13bn in FY22 (GSe ~A$1.3bn). Energy Markets FY21 electricity and gas volumes were both consistent with expectations.
• Valuation at A$6.10/sh; Buy: We continue to see material upside to existing traded prices Origin in a valuation scenario which excludes all carbon intensive generation assets valuing the portfolio at A$5.09-8.70/sh.