Origin slumps on disappointing outlook after record profit

Investors dump Origin shares following the energy major’s outlook guidance, which many believe is too conservative, after booking a record profit.

Origin Energy has reported a record annual profit after reaping the benefits of cheap coal and depressed renewable energy generation, but its shares slumped more than 10 per cent after it warned that the performance of its energy business would dip.

The outlook took the shine off a result that many shareholders will have interpreted as evidence that they were right to reject Brookfield and EIG’s near $20bn takeover offer late last year.

Origin said underlying profit increased to $1.18bn for the 2024 financial year, $436m higher than the previous year, driven by an increase in earnings from its retail energy business and its LNG business in Queensland.

Revenue rose to $3.53bn from $3.11bn last year.

The record net profit is only the third time that Origin has reported net gains of more than $1bn, but investors seized on the company’s guidance.

Origin said revenue from its energy markets business was likely to total between $1.1bn and $1.4bn, down from $1.66bn this year.

Chief executive Frank Calabria said the decline would be driven by increased coal costs and decreased revenue from households and business, partly offset by the performance of the company’s LNG business and its stake in British company Octopus ­Energy.

“Electricity profits are expected to decrease as tariffs reprice to reflect lower wholesale costs and retail margins, and on higher coal procurement costs.

“At Octopus Energy, earnings are expected to increase while Australia Pacific LNG production is expected to continue to perform well,” Mr Calabria said.

The decline in revenue is expected to be driven by its Origin’s coal-fired generator Eraring, which was a major contributor to 2024 profits.

Origin said earlier this month that output from NSW’s largest electricity generator had hit a five-year high as it took advantage of the so-called coal cap – a limit on how much generators pay for coal implemented by the federal and state governments in a bid to decrease household and business bills.

Generators that exercised that option would then agree to maximise electricity generation, which helped bring household bills down.

With global energy markets moderating after reaching record highs, the coal cap has now ­expired.

Mr Calabria said Origin would now have to pay about $30 more per tonne of coal.

As costs rise, Origin and other retailers will receive less from households and businesses after the Australian Energy Regulator earlier this year said that annual tariffs would need to fall after the cost of generating electricity ­decreased.

Both the increased costs and decreased retail margins had been widely known, but analysts said the magnitude of the effect on Origin was higher than they had anticipated.

“The earnings trough in FY25 we have been warning we must get through before medium term growth is deeper than forecast,” Citi analysts said in a note to ­clients.

Bank of America analyst Reinhardt van der Walt said Origin was probably being conservative with its guidance, and he expected the company to be able to use its fleet of gas-fired power stations and household batteries to more than compensate. He expects the impact to be temporary, with annual tariffs for households and businesses set to rise again on July 1.

“We believe first-time financial year energy markets guidance looks slightly conservative and expect progressive upgrades through the year as Origin realises value from flexible generation fleet,” Mr van der Walt said.

While Origin has a history of understating early guidance, its shares slumped.

They closed at $9.60, down 9.43 per cent, despite Origin lifting its dividend.

Origin will pay a final dividend of 27.5c per share, fully franked, up from 20c in the prior year.

The dividend payment also underwhelmed some shareholders who had been hoping for higher returns. Origin is grappling with how to make the transition to renewable energy while simultaneously rewarding investors, though the company is bolstered by its LNG export business and its Octopus investment.

Origin has a minority interest in the Australia Pacific LNG development, one of Australia’s largest LNG exporters, and a 23 per cent stake in Octopus Energy – one of the world’s fastest-growing energy businesses. Origin said it expected Octopus to generate between $100m and $200m in the next financial year, up from last year’s $55m.

The revenue streams will allow Origin to develop the 4GW-5GW of renewable energy it has pledged to deliver. It has announced several batteries with 1.5GW total capacity, and a development in South Australia is being worked on. New wind and solar generation projects are expected to be delivered with funding from outside partners.

The outlook took the shine off a result that many shareholders will have interpreted as evidence that they were right to reject Brookfield and EIG’s near $20bn offer late last year.

Origin said underlying profit increased to $1.18bn for the 2024 financial year, $436m higher than the prior year, driven by an increase in earnings from its retail energy business and its LNG business in Queensland. Revenues rose to $3.53bn from $3.11bn last year.

The record net profit is only the third time that Origin has reported net gains of more than $1bn, but investors seized on the company’s guidance.

Origin said revenues from its energy markets business would likely total between $1.1bn-$1.4bn – down from around $1.66bn this year.

Chief executive Frank Calabria said the decline would be driven by increased coal costs and decreased revenues from households and business, though some will be offset by the performance of the company’s LNG business and its viable stake in the UK energy company, Octopus Energy.

“Electricity profit are expected to decrease as tariffs reprice to reflect lower wholesale costs and retail margins, and on higher coal procurement costs. At Octopus Energy, earnings are expected to increase while Australia Pacific LNG production is expected to continue to perform well,” said Mr Calabria.

The decline in revenues is expected to be driven by its Origin’s coal generator Eraring, which was a major contributor to 2024 profits.

Origin said earlier this month that output from NSW’s largest electricity generator hit a five-year-high, as it took advantage of the so-called coal cap, a limit on how much generators would pay for coal implemented in co-ordination by the federal and state governments.

In a bid to decrease household and business bills, governments capped the price of coal - allowing generators like Origin to buy their fuel source for less than they would have typically been able to. Generators who exercised that option would then agree to maximise electricity generation that helped bring household bills down.

With global energy markets tempering from record highs, the coal cap has now expired and Mr Calabria said Origin will now have to pay approximately $30 a tonne more for its coal.

As costs rise, Origin and other retailers will receive less from households and businesses after the Australian Energy Regulator earlier this year said annual tariffs will need to fall after the cost of generating electricity had decreased.

Both the increased costs and decreased retail margins had been widely known, but analysts said the order of magnitude impact on Origin was higher than they had anticipated.

“The earnings trough in FY25 we have been warning we must get through before medium term growth is deeper than forecast,” Citi analysts said in a note to clients.

Reinhardt van der Walt, analyst at Bank of America, said Origin was likely being conservative with its guidance, and he expected the company to be able to use its fleet of gas power stations and household batteries to more than compensate. He expects the impact to be temporary, citing annual tariffs for households and businesses are set to rise again from July 1.

“We believe first-time financial year energy markets guidance looks slightly conservative and expect progressive upgrades through the year as Origin realises value from flexible generation fleet,” said Mr van der Walt.

While many accepted Origin has a history of understating early guidance, shares slumped. By midday, they were down 10 per cent to $9.56 despite Origin lifting its dividend.

Origin will pay a final dividend of 27.5c per share, fully franked, up from 20c in the prior year.

The dividend payment also underwhelmed some shareholders who have been angling for higher returns. Origin is grappling with how to deliver its transition to renewable energy while simultaneously rewarding investors, though the company is bolstered by its LNG export business and its Octopus investment.

Origin has a minority interest in the Australia Pacific LNG development, one of Australia’s largest LNG exporters, while it has a 23 per cent stake in Octopus Energy - one of the world’s fastest growing energy business. Origin said it expects Octopus to generate between $100m to $200 million in the next financial year, up from last year’s $55m

The revenue streams will allow Origin to develop its 4-5GW of renewable energy that it pledged to deliver. It has announced a spate of batteries, about 1.5GW so far, though a development in South Australia is being worked on. New wind and solar generation projects are expected to be delivered with funding from outside partners.