Origin flags hit of up to $1.24bn as oil prices slump
Origin Energy has become the latest victim of the oil price crash, bracing for a hit of up to $1.24bn in writedowns and charges.
Origin Energy has become the latest victim of the oil price crash, bracing for a hit of up to $1.24bn in writedowns and charges, including on its Australia Pacific LNG project in Queensland.
Australia’s largest electricity retailer will take non-cash, post-tax charges of $1.16bn - $1.24bn in its annual results on August 20 due to lower oil and gas prices, the economic downturn from the COVID-19 pandemic and a move to lower carbon energy supplies.
A $720m-$770m impairment will be recorded for APLNG while a $440m-$460m charge will be taken on a 20-year contract with Sempra Energy’s Cameron LNG facility in Louisiana due to weaker LNG prices.
Origin is also hiking the amount it will spend to rehabilitate its Eraring coal-fired plant in NSW by $187m and gas generation sites by $62m, and will take a $25m-$35m hit to underlying profit from bad debts, as the pandemic affects customers’ ability to pay their energy bills.
Despite the charges, Origin reiterated no changes to its 2020 financial year guidance with energy market underlying earnings of $1.4bn-$1,5bn expected for the year.
“Origin has responded quickly to COVID-19 and the decline in commodity prices, reducing operating costs and capital expenditure, and these actions have improved resilience and helped to mitigate some of the impacts on our business,” Origin chief executive Frank Calabria said.
“These factors, and the broader macroeconomic environment, have contributed to our revised medium and long-term outlook for commodity prices.”
Origin expects a real Brent oil price of $US40 a barrel in the 2021 financial year, rising to $US45 in 2022 and up to $US66 a barrel by 2026.
The energy producer is the third major Australian player to record major writedowns this week after Woodside Petroleum took a $6.3bn hit and Oil Search taking impairments of up to $575m on its Papua New Guinea assets.
Origin’s APLNG impairment will be excluded from annual profit and will have no “impact on tax expense with the impact offset by recognising part of a previously unrecognised deferred tax liability”. Origin noted there will be no difference between the pre and post-tax charge.
Origin described the Cameron LNG charge as an onerous contract provision and said since December 31 there had been a change in assumptions on LNG prices due to weaker medium term demand and moderately lower long-term prices, along with lower US Treasury bond rates.
While the non-cash charge will be excluded from 2020 underlying profit, Origin expects it will take a $25m annual post-tax charge for the next 20 years on the contract due to the changed assumptions and forward market prices.
A $249m provision for restoration of its Australian coal and gas power generation sites will be taken to allow the facilities to be repurposed for commercial and industrial use. However, it will release an underlying profit charge of $25m on Eraring related to soil and groundwater contamination after conducting more detailed analysis and sampling.
RBC said Origin’s mix of earnings from gas and power markets made it more appealing than some of its competitors.
“The non-cash charges expected in FY20 do not impact Origins dividend policy, which is based on 30-50 per cent of free cash flow. We continue to see potential for Origin’s dividend payments to be at the high end of company guidance,” RBC analyst Gordon Ramsay said.
Australian oil and gas producers have for months been tipped to follow global majors in suffering with writedowns due to lower oil and gas prices, Macquarie warned on June 30.
The nation‘s top producers have typically used $US70-$US75 a barrel for impairment testing purposes compared with Brent crude which is trading at $US42 currently, following several months below $US30 territory earlier this year.
LNG, which typically takes three months to reflect any movement in crude prices, has also been trading at record lows in Asia due to a supply glut and uncertain demand from the COVID-19 pandemic.
BP took a writedown of as much as $US17.5bn in June after cutting its oil price assumptions by 30 per cent out to 2050 while in Australia Shell and PetroChina‘s Arrow Energy took a $520m impairment on their gas business. Shell on June 30 said several of its high-profile Australian gas projects were to blame for a massive $US8bn-$US9bn writedown triggered by lower prices amid a COVID-19 demand shock.
Capitalised oil and gas assets total $52bn among the big Australian producers Woodside, Santos, Oil Search and Beach Energy, industry analysis shows, while exploration and evaluation assets total more than $12bn for the same four companies.
Australian oil and gas producers have already embarked on billions of dollars of cost cutting this year in response to the oil rout.
Origin was last up 1.2 per cent to $5.82 at 1500 AEST.