The new management at Origin Energy has kept their word and revealed details to split the company in two to meet demands from investors for a more transparent structure.
Origin is Australia’s largest gas and power retailer, but has been under growing pressure to separate that cash flow based business from its more speculative energy exploration, distribution and export operations, especially its export LNG project in central Queensland.
The sale is the first major move by new chief executive Frank Calabria, who only took over from long-standing predecessor Grant King in October. He said he said Origin’s board had considered many options and decided that an IPO of the oil and gas business was the best.
Origin says it will divest its conventional upstream oil and gas business through an initial public offering, with the proceeds to be used to reduce the group’s debt.
The group will keep its energy markets business as well as its interest in the Australia Pacific LNG project in Queensland, the Ironbark development and the Browse and Beetaloo basins.
The shares rose nearly 4% to $6.66, then came back a touch to close the day up2.5% at $6.58.
The company argues that move is needed so it can focus on its retail and unconventional gas businesses, a reversal from its position in September when it said such a spin off was not being considered. But that was under former CEO Grant King.
Three months on, the departure of Mr King, a new CEO and the board supports the 180 degree turnaround in policy. The spin-off, which does not require Origin shareholder approval, is due to happen next year.
The spin-off will include Origin’s gas projects in the Otway, Cooper, Bass and Bonaparte Basins in Australia, as well as the Perth Basin interests, which will now not be sold, Origin said. It will also include the New Zealand interests in the Kupe gas project and in the Canterbury basin. The retaining of the $25.9 billion Queensland LNG project will worry some investors and analysts who feel it s a bit of a white elephant and won’t make much money (there are two similar projects next door in Gladstone.
Origin hasn’t put a value on the assets to be spun off . JPMorgan analyst Mark Busuttil estimated they are worth $1.8 billion, while adding that on the multiple that Beach Energy trades on the value could reach $3.7 billion. RBC reckons an enterprise value of between $1.6 to $1.8 billion.
Chairman Gordon Cairns, who said only in September that a demerger was not under consideration, said in a statement yesterday that the sale would allow Origin to focus on its energy markets business and the “simplified” integrated gas business.
"The decision to divest is consistent with Origin’s strategy to focus the business, reduce debt and improve returns for shareholders," Mr Cairns said.
"Given Origin’s ability to invest capital in NewCo assets is constrained, their long-term value will be better supported by them being an independent business."
Origin claims the split will add to its earnings per share starting in 2018-19 and deliver higher returns on capital as soon as it takes place, which is what the spin off is all about – a bit of financial sleight of hand, as well as placating nervy investors and banks.
