Origin gas revenues slide 12pc in March quarter
While taking a hit on revenue, Origin managed to renegotiate a critical supply deal with no change to the contract price.
Origin Energy saw gas revenues fall 12 per cent in the March quarter but managed to renegotiate a critical LNG supply deal with Sinopec at the same price while electricity volumes dipped amid the start of the COVID-19 downturn.
The integrated gas producer and electricity retailer said while production at its Australia Pacific LNG plant in Queensland only dipped 1 per cent, revenues declined 12 per cent to $629m as customers cut the amount of gas they bought in response to a supply glut and lower industrial use because of the coronavirus.
LNG revenues tumbled 17 per cent for the three months to March on the prior quarter after Sinopec - a 25 per cent partner in the Origin-operated APLNG - cut 10 per cent of the volumes it will buy this year under an industry clause known as downward quantity tolerances, where customers can trim agreed tonnes without paying extra charges.
That was partly offset by a 39 per cent jump in domestic gas income as sales were made on the spot market to local customers.
Origin said the first price review under APLNG’s long-term contract with Sinopec was completed with no change to the contract price, easing market fears at a fragile time for LNG markets with spot prices at record lows of under $US2 per million British thermal units amid plummeting demand.
No arbitration option was available under the terms of a first review and Sinopec may look to drive a harder bargain at the next price assessment, RBC said.
“We think APLNG agreeing to terms with no change to contract price is a big differentiator against peers that will be negotiating price reviews lower as a result of declining industry slopes and weaker spot markets,” RBC analyst Ben Wilson said.
APLNG’s oil price was slightly lower at $US65 a barrel from $US69 a barrel three months earlier, with the current crude market rout typically taking three months to work its way through to LNG contract prices.
Gas prices on Australia’s east coast decreased 24 per cent to $5.74 a gigajoule from $7.51 a gigajoule in the prior quarter, reflecting its linkage to lower Asian prices along with lighter demand due to COVID-19.
Electricity volumes in its energy markets business dipped 7 per cent as more solar led to lower usage while customer numbers declined. Business volumes fell 3 per cent as contracts expired.
The demand impacts of the pandemic remain in line with Origin’s earnings guidance assumptions for the 2020 financial year, the company said.
“We are already seeing an initial impact from the pandemic on electricity demand, which along with milder weather and lower customer numbers and usage, contributed to lower volumes compared to this time last year,” Origin chief executive Frank Calabria said.
Origin has announced a plan to slash up to 30 per cent of spending in 2021 with a major cutback on its APLNG export project due to lower oil prices and COVID-19 uncertainty.
Capital expenditure for the 2021 financial year will be cut between 25 per cent to 30 per cent from its previous 2020 guidance of $530m to $580m. Guidance for 2020 has also been lowered by 5 per cent to 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.
Origin was up 2.5 per cent to $5.24 at noon (AEST) on Thursday.