Origin Energy (ORG) will suffer a loss of around $270 million in its 2014-15 results later this month after the $NZ1.8 billion ($A1.6 billion) sale of its 53.1% stake in NZ power supplier, Contract Energy.
The sale process moved a step closet to completion yesterday with the finalising of a bookbuild process for the share sale by Origin’s adviser, Macquarie.
The loss will result from an impairment charge as Origin deconsolidates Contact from its accounts when the sale of the stake settles.
Origin said yesterday the sale involved a broad range of New Zealand, Australian and international institutional investors as well as New Zealand retail investors.
Origin says the sale of its stake in Contact will cut financial risk, given the reduction to its debt which has grown to about $A12 billion due to spending on the $A24.7 billion Australia Pacific liquefied natural gas project in Queensland.
That debt build-up has seen Origin’s credit rating reduced to near junk levels by ratings groups. The revenue from the Contact sale will trim that back under $A10 billion temporarily as debt is repaid and Contact’s debt is removed from Origin’s balance sheet.
Fairfax Media quoted Credit Suisse analyst Mark Samter as saying he struggled to reach the same conclusion at Origin about the Contact sale, given earnings would become more volatile with the loss of Contact.
"The immediate impact of the transaction is actually negative in terms of Origin’s credit metrics and cash flow," Mr Samter said in a note to clients.
"It’s not until steady state production from APLNG, which we do not expect until FY18, that the sale of Contact becomes an incremental positive."
Fairfax said that Deutsche Bank analyst John Hirjee though took a different view, describing the sale as “a prudent measure and an incremental positive given it improves Origin’s debt metrics, increases financial flexibility and helps to ensure it retains its BBB- credit rating in a volatile oil price environment”.
ORG 1Y – Origin sells stake in Contact
Moody’s Tuesday night placed Origin on a review for a potential downgrade in its rating from Baa2 to Baa3. In other words, Moody’s disagrees with Deutsche Bank’s analysis.
Moody’s senior analyst Spencer Ng said in a statement the review “reflects the negative impact of the (Contact) divestment on Origin Energy’s credit profile, mainly because it will reduce the group’s revenue diversity without materially improving financial leverage".
Specifically, the sale of Contact would further increase Origin’s exposure to the crude oil price as production from APLNG ramps up, Mr Ng said.
Mr Ng said Moody’s expects Origin’s financial position to weaken again as debt is drawn down to fund the completion of the second production unit at APLNG before recovering after output increases up.
He also pointed out that Origin’s credit profile will also be influenced by its ability to maintain earnings growth in its Australian energy markets business.
Origin’s ratings will be downgraded to Baa3 with a stable outlook if the transaction is completed as announced, Moody’s said in its statement.
Origin shares fell 3.6% to $10.6.
