Origin Energy to spin off and float oil and gas projects
Origin Energy will spin off and float its $1.8bn upstream energy business to focus on energy retail and its gas unit.
Energy heavyweight Origin Energy has detailed plans for a demerger of its conventional upstream energy business, which analysts value at up to $1.8 billion, in a move that will leave it to focus on its energy retail operations and integrated gas unit that includes its mammoth Australia Pacific LNG project in Queensland.
The IPO of the division will take place next year, with the move a signal that new chief executive Frank Calabria is keen to make his mark on the company after longserving boss Grant King departed in October.
Mr King had served in the top role at Origin (ORG) since it was spun out of Boral in 2000.
The conventional upstream business that serves as the focus of the IPO supplies both the Australian and New Zealand domestic markets and will include interests in the Otway Gas Project, BassGas Project, Kupe Gas Project and the Perth, Cooper, Bonaparte and Canterbury basins.
Origin’s demerger plan will not impact its stakes in APLNG, Ironbark and the Browse and Beetaloo basins.
The initial market response was positive, with analysts largely supportive and Origin’s share price surging.
RBC Capital Markets analyst Ben Wilson said that based on the spin-off’s reserves of 950 petajoules of gas and oil and its production of 75 PJ a year, it was in the same ballpark value as Beach Energy.
“The Origin business has longer dated reserves and higher production, however,” Mr Wilson said. “We value the Origin conventional E & P business on an enterprise value basis at about $1.6bn to 1.8bn.”
He said RBC had an enterprise value of about $1bn on Beach, versus a market enterprise value of $1.5bn.
The market value of the Origin spin-off will also depend on how much net debt it has once it is floated next year, if the transaction goes ahead.
Mr Wilson said Origin had likely pulled the trigger on a demerger earlier than anticipated given the recent run-up in oil prices and possibly due to struggles offloading its Perth and Cooper Basin assets.
Further details were sought on the debt loading of the new business and financial benefits to ensure a more complete view, but Mr Wilson viewed the deal as a constructive step on the surface.
“Conceptually we are supportive of the notion of assets transferring to a vehicle which may be more growth focused (from a capital spending standpoint),” he said.
“We think some may be disappointed that a larger carve-up is not proposed, one which would leave an Origin Energy markets business excluding APLNG. However as an initial move we think the market will like this.”
At 10.10am (AEDT), Origin shares had jumped 3.4 per cent to $6.64, as against a 0.8 per cent rise in the broader market.
Origin said the move had been made to further strengthen a balance sheet that had been stretched by its heavy investment in APLNG at a time when global energy prices had sunk.
“The divestment of Origin’s conventional upstream business will be a major step towards restoring the company’s financial flexibility and is expected to improve Origin’s return on capital,” Mr Calabria said.
Origin said the spin-off, which it was today referring to as NewCo, would be a mid-cap energy exploration and production company on the ASX, while the move is seen boosting its earnings from fiscal 2019 onwards.
It is not intending to hold a stake in the demerged vehicle post-listing.
The new company will enter into contracts with Origin prior to listing that will see the latter receive access to existing resources and rights to undeveloped resources.
Chairman Gordon Cairns added the company’s focus on core assets meant the conventional upstream business would not receive the injection of capital required to fully realise its potential without going its own way.
“The divestment of Origin’s conventional upstream business will allow the company to focus on its energy markets business and the simplified integrated gas business,” he said.
“Given Origin’s ability to invest capital in the NewCo assets is constrained, their long term value will be better supported by them being an independent business.”
The activity comes after a failed sales process for the Perth Basin project as part of an ongoing asset divestment program, with those assets rolled into the new company.
“Despite active interest in the Perth Basin assets, Origin has terminated the sale process of these assets and will include them in NewCo’s portfolio,” Mr Calabria said.
“The inclusion of these assets adds to the geographic diversification and exploration potential of NewCo. The sale processes for the Darling Downs pipeline and Stockyard Hill wind farm are underway and progressing as planned and are on target for completion by June 2017.”
Proceeds from the float are earmarked for debt reduction and the closing out of $350 million in oil forward sale agreements entered into in fiscal 2013.
Origin has tapped Macquarie Capital and UBS to serve as joint lead managers on the float, which will not require shareholder approval.
Ratings agency Standard & Poor’s said this morning the IPO would not hamper the group’s ratings and would likely prove a long-term positive.
“In our view, this potential transaction demonstrates Origin’s commitment to realign its activities toward its core utilities business, moving away from the more-volatile and capital-intensive exploration and production segment,” S & P said.
“We do not view the loss of equity gas as negative given that Origin would enter into long-term gas supply agreements, ensuring its long-term access to domestic gas reserves.
“Although the financial benefit of the transaction will be directly correlated to the potential success of the IPO, we expect those benefits to increase over time.”
