A wary thumbs down from some analysts for Origin Energy’s planned float of its conventional petroleum business.
Analysts and investors reckon its a compromise and for that reason the shares fell another 2.5% yesterday to close at $6.41, one cent under the close on Monday, before Tuesday’s announcement of the split.
The big concern for many analysts and investors is that the split does not deal satisfactorily with the millstone around the Origin share price – the 37.5% stake in the $25 billion LNG project in central Queensland which remains with Origin and doesn’t go into the spin off (which seems to have been the option investors and analysts want to see).
RBC Capital Markets analysts described the split as “a half-way house towards the ideal outcome” and suggesting the sale of the Queensland LNG project may still be on the cards.
But such a full demerger is not feasible given current debt levels, and the requirement for the Australia Pacific LNG venture in Gladstone to complete performance tests required by lenders to the project (Gotta make sure the thing works and we can get our interest payments at least).
On announcing the limited spin off on Tuesday, Origin’s new CEO, Frank Calabria said the including of APLNG within the petroleum business to be floated, dubbed NewCo, hadn’t been considered and that it wouldn’t fit within that mid-cap company.
RBC analyst said the IPO proposal "has merit" in reducing the complexity of Origin Energy and reducing the volatility of returns, while also reducing debt. But he said the plan lacked detail, pointing out the lack of information around NewCo’s capital structure, its board and management, and the timing, which Origin only gave as 2017.
"We would not rule out a future divestment of APLNG as the operations derisk through CY17," he told clients, pointing to the "infrastructure-like appeal" of such projects because of their long-term contracts.
"We think the APLNG will have buyer appeal as the extent of Asia’s future gas needs becomes apparent."
Citigroup judged the IPO strategy merely "OK", saying it was "not game-changing".
It said the plan does little to change the petroleum divisions poor history of project delivery and asset performance and doesn’t reduce risks at the APLNG venture. He also noted that value would be lost through fees and the IPO process and pointed to "substantial uncertainty" still surrounding NewCo.
And JPMorgan’s, described the spin off plan as “a short-term balance sheet fix," given the proceeds of the float could net Origin as much as $3 billion to be directed to debt reduction.
And that still seems to be the reason for the split – to give the market something to focus on apart from the LNG project. Origin’s return on capital will improve once the spin off happens and JPMorgan’s assessment is spot on because that should see Origin’s share price rise.
