Origin cuts spending amid oil rout, coronavirus
Origin Energy to slash up to 30pc of spending in 2021 as lower oil prices and COVID-19 uncertainty hit energy producers.
Origin Energy will slash up to 30 per cent of spending in 2021, with a major cutback on its Australia Pacific LNG export project, as lower oil prices and COVID-19 uncertainty continue to roil the nation’s energy producers.
The electricity and gas supplier has retained its earnings guidance for the 2020 financial year despite significant volatility but has acted to reduce costs over the next few years given uncertainties over the length of any downturn.
Capital expenditure for the 2021 financial year will be cut between 25-30 per cent from its previous 2020 guidance of $530m to $580m. Guidance for 2020 has also been lowered by 5-10 per cent.
The bulk of that decline will come through a targeted $300m to $400m reduction in its APLNG upstream spending, reflecting lower development activity, exploration and appraisal. No material changes to 2021 production are expected but Macquarie expects a hit the following year.
“The extent of APLNG capex reduction is more significant than expected, which will have an impact to FY22 production levels. At this stage the quantum is difficult to estimate as the well program is expected to rebound in subsequent years,” Macquarie analyst Ian Myles said.
A $100m cut in its energy markets business continues to be targeted by next year compared with its 2018 financial year baseline.
Origin has not cut any jobs despite the oil rout, though a hiring freeze is in place.
“Origin has not reduced roles as a result of COVID-19 or the reduction in oil prices, but we have ceased recruiting people for new roles for the time being,” chief executive Frank Calabria said. “Given the uncertainty around the full economic impact, our focus is on managing costs and reducing discretionary spending, in the interest of protecting jobs as best we can.”
While oil prices have crashed this year to $US33 a barrel, Origin said it has significant headroom in its debt covenants at current oil prices for multiple years and more than 24 months of committed and undrawn liquidity.
It holds $3.8bn of liquidity meaning it can meet upcoming debt maturities of $1.2bn in December 2020 and $2bn in October 2021. Overall, it holds net debt of $5.6bn with gearing at 29 per cent and Citi says it won’t need to raise any debt until 2023.
Despite volatility, Origin retained its 2020 underlying earnings guidance of $1.4bn to $1.5bn.
Still, those figures remain subject to any material jumps in bad debts as the economy heads into recession from the pandemic shutdown.
“The uncertainty that exists around how long this situation will last and how deeply it will affect the economy and our customers is making it challenging to accurately assess the impacts on provisioning for bad and doubtful debts,” Mr Calabria said.
Origin’s reiteration of full-year earnings guidance is positive in that it’s been able to handle a lower commercial and industrial load without any material impact on its energy markets book, Macquarie said.
Cash distributions from APLNG are also unchanged at $1.1bn to $1.3bn.
Citi says Origin averted two key risks: retaining its APLNG cash distribution guidance means its annual dividend is safe while its energy market guidance was also reiterated despite the uncertainty of bad debts.
Origin shares closed up 4 per cent at $4.95.
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