Origin slumps after gas price shock

A shock ruling has seen Origin Energy slapped with a $30-40m bill after a tribunal ruled it should pay for more gas.

Origin's 'Otway' gas processing plant on top of the Iona gas field, near Port Campbell. Picture: Stuart McEvoy, The Australian.

Origin Energy shares have slumped almost 9 per cent as the group slashed earnings guidance for the current financial year, after being forced to pay $30m-$40m extra for Otway gas.

A tribunal awarded Beach Energy the high price for gas it sells the energy giant after a protracted squabble over pricing with Origin.

Origin’s outlays under the terms of the deal will see payments to Beach Energy balloon by $60m-$80m extra in 2022-23.

The binding decision, reached by arbitration, leaves Origin limited rights to appeal.

The contracts subject to arbitration date from Beach Energy’s acquisition of Lattice’s assets from Origin in 2017, which had been set for fixed price increases linked to CPI until 2021.

Under the terms of the deal Origin will receive 13 petajoules this financial year, set to grow to between 20-30 petajoules in the 2022-23 financial year.

Origin wrote down its guidance for underlying energy markets EBITDA on the back of the decision down from $1bn-$1.14bn to $1.2bn-$940m.

The market sold down Origin in response, with shares in the energy giant closing down 8.94 per cent at $4.28, a six-week low.

Origin CEO Frank Calabria slammed the ruling.

“We are disappointed in this decision which we believe is wrong, and entirely inconsistent with our prior experience in the gas market,” he said.

“This will result in a gas price that does not reflect market prices, and is therefore a very poor outcome.”

Origin also flagged a further round of price reviews with Beach Energy in the coming year related to gas supply contracts from the Cooper Basin.

The negative pricing decision was coupled with warning from Origin of “continued subdued energy demand and wholesale pricing” which would drag down profits along with shortfalls in profits from the company’s 20 per cent stake in Octopus Energy.

“Natural gas gross profit is expected to decline, due to higher procurement costs as a result of price review and increases in the JKM index,” Origin told the market.

“Lower volumes and prices on commercial and industrial sales reflect current subdued domestic market conditions.”

But markets welcomed Origin’s pain as Beach Energy’s gain, with $30m-$40m more set to flow to the business as a result. Shares in Beach Energy spiked 4.64 per cent to $1.80, their highest point since February.

On the back of the deal RBC analysts locked in an outperform recommendation for Beach, noting it was well placed to delver from a balance sheet with near-zero gearing.

RBC analysts noted the Lattice gas contracts which were subject to the arbitration represented about 10 per cent of Origin’s gas portfolio and 15 per cent of Beach’s.

Analyst Gordon Ramsay said the arbitrated result was “possibly better” than earlier forecasts of a $1-$2/gigajoule price increase.

“We expect future repricing of legacy volumes to deliver higher gas revenues for Beach,” Mr Ramsay said.

“We continue to positively view Beach’s Otway Basin offshore gas drilling program, mainly because it involves low risk, near-hub, wells that offer an early path to commercialisation with potential to add considerable value to the company.”