New Origin CEO plans asset IPO

Energy company, Origin Energy (ASX:ORG), added value in January, with the stock up 73% from its level a year ago. We see several drivers for the recent outperformance, including:

• delivery of two LNG trains at the APLNG plant in Gladstone
• an overall simplification of the business with material cost savings from a reduction in headcount as APLNG construction winds down and productivity improves across the Energy Markets (utility) division
• debt reduction from asset sales and improving operational cash flow, and
• the recovery in the oil price (which benefits its LNG production) following initiatives by OPEC to manage supply down to lift prices.

The new CEO, Frank Calabria, has signaled his intention to reduce debt further and simplify the business via the proposed IPO of various assets. We support the concept of the IPO, assuming ORG does not damage its long-term value by limiting its access to the gas assets to be housed in the new vehicle.

ORG’s access to both equity and contracted gas supply in a tightening East Coast market was central to our ORG investment thesis. No doubt Calabria understands the critical nature of these arrangements and the need to preserve and generate value for both parties. (VIEW LINK)