Price regulations dent Origin Energy profit
Origin Energy’s profit dipped 10pc, after power plant outages and a hit from price regulations offset strong LNG earnings.
Australia’s biggest electricity and gas retailer Origin Energy said Sinopec has cut the amount of gas it buys from the Australia Pacific LNG project in Queensland, as talks open between the partners over striking new a new price contract.
Sinopec, a 25 per cent partner in the Origin-operated APLNG, has cut 10 per cent of the volumes it buys from the project in 2020 under an industry clause known as downward quantity tolerances where they can trim agreed tonnes without paying extra charges.
A global supply glut and the coronavirus have trimmed China’s gas needs, with demand only seen rising by 4 per cent this year rather than prior estimates of 13 per cent growth, according to analysts.
Origin can sell the gas cargoes into the domestic market in Australia or on international LNG spot markets, chief executive Frank Calabria said.
A 14-day quarantine period for ships departing China imposed by the Queensland government is not causing any major disruption given the similar timing of shipments between the destinations.
The first price review under APLNG’s contract with Sinopec has also been triggered at a fragile time for LNG markets, with spot prices at record lows of $3 per million British thermal units.
Still, the Origin chief was reluctant to be drawn over how current market conditions might influence negotiations.
“APLNG will form a position as to what is an appropriate price and that will be having regard to other contracts over a period of time and it will form a view as to what that price might be including no change to the price,” Mr Calabria told The Australian.
With no arbitration option available under the terms of a first review, Origin could see current pricing continue according to broker RBC.
“We think that is a key differentiator for APLNG in a weaker LNG market precipitating contract price resets at lower levels across the industry,” RBC analyst Ben Wilson said.
Despite a strong performance from its integrated gas division, Origin saw its net profit dip 10 per cent for the first half of 2020, after power plant outages and a hit from price regulations offset robust LNG earnings.
Outages and lower customer numbers saw its energy market division suffer a 15 per cent fall in underlying earnings to $723m from $852m.
Conversely, underlying earnings from its integrated gas unit rose 7 per cent to $906m.
Origin retained its expectation for annual underlying earnings in its energy market division of $1.4bn to $1.5bn, while production from its Australia Pacific LNG project in Queensland is seen at the upper end of a 690 to 710 petajoule range. It expects a cash distribution from APLNG of between $1.1bn to $1.3bn.
The company declared a fully-franked interim dividend of 15c per share — up from 10c at the same time last year but slightly lower than market estimates — based on strong free cash flow growth during the period.
Capital management was a balancing act given market risks, Origin said.
“You have to make an assessment about the world and the environment that we face and now our assessment is probably the world we face is probably a little bit riskier than what it
was towards the end of last year,” chief financial officer Lawrie Tremaine said.
Origin blamed price re-regulation imposed by the federal government, lower customer numbers, the loss of generation at its Mortlake gas unit in Victoria and a fall in Eraring coal output for the lower earnings performance.
Fund manager Allan Gray said headwinds in Origin’s power business had been well flagged to the market.
“Many are the results of policy interventions over the last few years. That has reset earnings to some extent,” Allan Gray analyst Suhas Nayak said. “Electricity customer numbers keep dropping which is one small area of concern, but it has been happening consistently for the last little while now and is something they manage and watch.”
Origin shares rose 1.8 per cent to $7.97.
