UBS has a "buy" rating on Origin Energy (ORG) and a $16.50 target price, up from $15.80.
"ORG management identify capital management as one of their four priorities and we think ORG's $12.6bn of debt in FY15e has moved to the top of the investor concerns list. The four ways to reduce debt are: (i) operating cash flow, this requires an oil price over A$100 or an improvement in electricity margins; (ii) issuing equity, (iii) selling assets; or (iv) pushing debt off the ORG balance sheet. Press reports (incl SMH) have indicated management no longer see the 53% of CEN as core and a sale could reduce consolidated debt by over A$3bn. Re-gearing APLNG post start-up could also help.
"The upside in ORG looks very straightforward. Over the next two years we anticipate operating cash flow to nearly double, eps to more than double, dps to grow more than 60% and the PE ratio to be under 9.5x, with a dividend yield of over 6%. In our view one thing that is required for this to come true is for the oil price to average US$82.7 in FY17e. Using a scenario of the futures curve for oil, we see around A$700m of distributions in FY17e from APLNG for ORG vs. the A$1bn we currently forecast.
"Opex and capex cuts of $150m over FY16 and FY17 partly offset by $25m solar start-up losses and gradual increases in coal costs. The key remains NSW retail margins, in our view, where we are materially more optimistic than management. ORG will likely finance ~$3bn of wind and solar investment over the next 5yrs and we see this as a good opportunity to earn a return on capital as there appear to be a scarcity of organizations prepared to write PPAs over new renewable energy."
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