Origin Energy Raises Earnings Forecast Amid Ongoing Takeover Bid

An Origin Energy power bill is pictured in Brisbane, Australia on June 8, 2018. (AAP Image/Dan Peled)

Australian energy retailer Origin Energy has raised its earnings forecast for the 2022-2023 financial year while it awaits a binding takeover bid from two global investment giants.

On Jan. 27, Origin Energy updated its earning forecast by lifting the earnings before interest, tax, depreciation and amortisation (EBITDA) for the current financial year from $500-$650 million (US$356-US$462 million) to $600-$730 million, a roughly 20 percent increase.

The company said the change was due to expected growth in natural gas and electricity gross profit from operating and trading activities and an increase in coal delivery under a previous contract.

Origin Not Affected by Government Coal, Gas Price Caps

At the same time, Origin noted that it would not be affected by the temporary wholesale gas and thermal coal price caps introduced by the federal government last December.

“No material impact is expected on FY2023 Energy Markets earnings as a result of the introduction of the $12/GJ (giagjoule) cap on uncontracted gas, given gas supplies for the year had been almost entirely contracted prior to the cap coming into effect,” it said in a statement.

However, it is worth noting that the revised earnings forecast does not include the potential impact of any government compensation paid to Origin if the company has to pay more than the price cap of $125 per tonne for coal to generate electricity.

The forecast also leaves out the financial impact of future supply contracts in which Origin has to sell coal at the capped price due to uncertainty about the mechanism and timing of the government’s policy.

Origin Energy's Australia Pacific liquefied natural gas facility at Curtis Island in north Queensland, Australia, on Oct. 10, 2016. (AAP Image/Origin Energy)

Regarding gas production, Origin reduced the estimated output of its Australia Pacific liquefied natural gas (LNG) project, citing the effects of wet weather earlier in the 2022-2023 financial year.

The new production forecast now stands at 660-680 petajoules, down from 680-710 petajoules previously.

Nevertheless, the energy retailer expected to see a lift of $140-$180 million in earnings from its LNG trading business in the coming years following additional hedging at favourable market prices.

Hedging is a risk management practice used by businesses to offset potential losses in investments through investing in a related asset in the opposite position.

Meanwhile, Origin forecasted a return on capital employed of less than four percent for the current financial year, which is below the company’s cost of capital but higher than the minus 1.5 percent recorded in the previous year.

Origin Awaits Takeover Proposal

The earnings forecast revision comes as Origin is waiting for an official takeover proposal from Canadian investment management firm Brookfield and EIG, a U.S.-based equity firm specialised in the energy sector.

In November 2022, Origin received a conditional and non-binding proposal from the two investment firms, which offered to pay $9 in cash for each share, effectively valuing Origin at $18.4 billion.

Following the takeover announcement, Origin granted the consortium the right to conduct due diligence–a process to examine the financial health, risks and other business problems of a potential target for a merger, acquisition or privatisation– to allow it to come up with a binding proposal.

However, Brookfield and EIG have not finalised the due diligence process despite Origin extending the deadline twice, with the last exclusive period for access to Origin’s accounts expiring on Jan. 24.

So far, there has been no indication of when the process will be completed, which has stoked fears among investors.

Nevertheless, the release of the earnings update has spurred the market’s confidence in the prospect of the takeover, causing Origin’s stock to rise by two percent to $7.48 by 11:30 a.m. AEDT on Jan. 27.

“Nothing better than a positive upgrade during a due-diligence period,” Macquarie Securities analyst Ian Myles said, reported by the Australian Financial Review.

Even if the consortium comes up with a final proposal, they still need approval from the Australian Competition and Consumer Commission for the deal to go through.

The competition authority has said it will conduct a public review that carefully considers any potential impacts of the proposed acquisition on the Australian energy market.

If the deal is completed, Origin’s assets will be split between Brookfield and EIG, with the former taking its energy markets business and the latter acquiring its integrated gas business.