Origin Energy’s (ASX: ORG) March quarter was soft. APLNG revenue fell 12% on the prior quarter because of lower production, lower LNG prices, and reduced domestic gas sales. Electricity sales volumes increased 4% on data center demand, while earnings guidance for UK-based Octopus Energy was downgraded.

Why it matters: We reduce our fiscal 2026 adjusted EBITDA forecast by 4% on reduced expectations for Octopus Energy, while lifting our 2027 and 2028 forecasts 11% on average on stronger contributions from APLNG.

  • Oil price strength since March should improve APLNG performance from fiscal 2027. The price lag in LNG contracts and oil price hedging prevents any material benefit in fiscal 2026. The stronger Australian dollar is a modest headwind.
  • We downgrade Origin’s share of Octopus Energy’s fiscal 2026 EBITDA to negative AUD 20 million, near the middle of the new guidance range and down from AUD 75 million previously. Management cites UK regulatory changes, higher gas capacity charges, and adverse weather as causes.

The bottom line: We lift our fair value estimate for no-moat Origin Energy by 4% to AUD 10.40 per share on stronger medium-term earnings relating to high oil prices. The stock is slightly overvalued, trading on a forward P/E of 18.

  • Strong oil and LNG prices are a major win for Origin, but we don’t think they will stay high in the long term. We use a long-term oil price of USD 65 per barrel, inflation-adjusted, which is based on the estimated cost of bringing on new supply.
  • The weak Octopus Energy performance is not totally surprising. Earnings have proven highly volatile in past years, which we attribute to it being less integrated, less diversified, and less mature than Origin’s Australian utility. More importantly, customer numbers continue to ratchet higher, with about 700,000 customer accounts added during the quarter. Upfront costs to accommodate strong growth are a key drag on profitability. As growth slows, profitability and stability should improve.

Origin’s earnings to fall in fiscal 2026 before rebound in 2027 on higher oil prices

Origin Energy offers exposure to relatively defensive Australian energy retailing and highly volatile liquefied natural gas exports. As a producer of commodities, Origin is a price-taker and has few competitive advantages. Capital and efficient scale are potential barriers to competition, but they’re not strong enough to justify an economic moat.

Origin’s domestic energy retailing business grew quickly during past decades, but strong acquisition-driven growth is unlikely to recur. Acquisitions of government-owned energy assets were previously a key growth driver, but all state-owned retailers are now privatized. Origin, Energy Australia, and AGL Energy collectively control 80% of the market, and the Australian market regulator is unlikely to allow further consolidation among the majors. Future growth depends on energy demand growth, which is likely to remain modest. We expect price-based competition to remain intense despite recent partial reregulation of electricity prices. A lack of competitive advantages means that we expect little more than tit-for-tat swapping of customers among the majors, which will allow them to largely maintain their market shares. We expect small new market entrants to struggle to achieve scale.

In contrast to the retail market, the electricity generation market offers some growth opportunities. Substantial new renewable energy projects still need to be built to meet government targets and offset closing of aging thermal power stations, with Origin planning to significantly expand its installed renewable capacity.

Domestic energy generation and retailing is Origin’s core business and the cash cow that funds growth projects. Its relatively low-risk attributes are in stark contrast to APLNG. Concerns relate to exposure to volatile oil prices (given the link to LNG contract pricing). Our long-term outlook assumes that significant Asian energy demand growth more than offsets increased supply and supports solid prices.

Bulls Say

  • The Australia Pacific LNG project is the largest coal seam gas to LNG project in Australia and is generating relatively strong returns in the current price environment.
  • Origin’s energy retail business is the market leader and should benefit from cost-saving initiatives.
  • Origin’s cash flow base is diversified, and the company is less susceptible to the vagaries of the market than a non-integrated energy provider.

Bears Say

  • The value of APLNG is highly uncertain, given volatility in the oil price and the relatively high operating leverage.
  • Low wholesale electricity and carbon credit prices have created a headwind for earnings. Retail price caps and competition also hurt.
  • Regulation is an ongoing risk for utilities.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.