Judging by the very strong trading update yesterday from Origin Energy, the price caps and other government moves to rein in rising prices that so worried investors have instead ended up being beneficial in Australia and the UK.
Origin has seen a dramatic improvement – on the eve of its takeover – in both Australia and in Britain.
In the highly disrupted UK energy retailing market in 2021 and 2022 (which saw a series of government price caps and controls and a string of failures among smaller rivals), Octopus Energy – in which Origin has a 20% minority stake – has survived and thrived to now be number two.
In Australia, the price and coal price caps have set up a situation where the company’s earnings will soar this year and next, raising the question of whether the takeover price is too cheap.
The upshot is a trading update with earnings guidance for the year to June 30 (that’s just two months away) jumping by between 30% and 50%!
Origin now expects underlying EBITDA for its Australian energy markets division for the June 30 year to be between $$950 million and $A1,200 million, much higher than the prior range between $A600 million and $A730 million.
The upgrade also makes a mockery of the concerns analysts, some shareholders and its suitors Brookfield and US investor EIG had about the impact of the caps – they trimmed their bid price to accommodate the controls, now the price looks underweight.
Brookfield and EIG had bid $A9 a share (or nearly $A19 billion) but then trimmed it to $A8.90 a share after the intervention in the energy supply markets by the Federal and NSW governments.
The $8.90 was further refined after further talks and now comprises $A5.78 per share and $US2.19 per share for all shareholders, or $8.912 a share based on a US70¢ exchange rate. (the Aussie dollar remains at just over 66 US cents a share). That’s around $18.7 billion.
That compares with Origin’s closing share price of $5.81 on November 9 last year, the day before the takeover proposal was announced.
The shares closed slightly higher on Monday at $8.38.
Under the deal, Brookfield – in partnership with Singapore’s Temasek and GIC – will take Origin’s energy markets business, comprising mostly power generation, and retailing. EIF’s MidOcean Energy will buy Origin’s 26% stake in Australia Pacific LNG in Queensland which both exports and supplies into the domestic market.
Origin’s actual experience has been very different to all those warnings in the wake of the government interventions.
The change in fortunes for Octopus Energy in the UK (where the government set caps on prices) has been dramatic – Origin said it “now expects to record a significant positive EBITDA contribution from Octopus in FY2023.”
That was after Origin recorded a loss of $A36 million in its EBITDA last year.
“Following the recent acquisition of Bulb, Octopus is now the second largest energy retailer by customer accounts.
“This, together with strong momentum in Kraken licensing, positions in international markets and across other energy services, means Octopus is well positioned to grow revenue and EBITDA margins as the energy transition continues to accelerate.”
But the impact here in Australia of those caps and controls has been extremely helpful for Origin’s bottom line.
The “underlying performance of Origin’s domestic Energy Markets business has also improved. Optimisation of Origin’s flexible electricity generation and gas supply portfolios in a lower wholesale price environment has reduced energy procurement costs and is expected to provide an earnings benefit over the balance of the financial year across both electricity and gas.”
Origin said that along with higher-than-expected coal deliveries under legacy contracts, it has also been able to secure additional coal supply at lower cost for its Eraring power plant, helping the earnings upgrade.
Origin said following the government’s $A125 per tonne price cap for coal sold to power plants in the states of NSW and Queensland, forward wholesale electricity prices have reduced, which should help lower consumer tariffs from 2024.
