Calabria takes a spanner to Origin’s strategic settings

Today’s spin-off marks a calibration of Grant King’s original Origin vision and points to more significant future sales.

New Origin chief executive Frank Calabria.

Less than two months after succeeding the long-serving Grant King as chief executive of Origin Energy, Frank Calabria has unveiled a significant reshaping of the integrated energy group’s portfolio.

After unveiling a senior executive shake-up last week, Calabria announced the group would divest its conventional upstream gas assets via an initial public offering next year.

The spin-off of the assets would leave Origin with its big energy markets business and the unconventional gas resources that support its 37.5 per cent interest in the APLNG export LNG project at Gladstone, as well as giving it some optionality in the larger market for Queensland gas where the two other big Gladstone LNG projects aren’t as well-resourced.

It would mark a departure from the strategy implemented by King over his 16-year tenure as CEO, underpinned by a vision of a fully integrated energy business and supported by a “long” position in gas and renewables.

It won’t, however, be a complete departure. While Origin will distance itself from its conventional exploration and production activities, it plans to enter contracts with “NewCo” that will give it access to the new entity’s existing resources as well as rights over undeveloped resources to support its east coast gas requirements.

The retention of the APLNG stake and the unconventional gas resources that support it might displease some.

Funding its exposures to the $25bn APLNG project put Origin under severe pressure, forcing assets sales and a $2.5bn capital raising in an environment of plunging oil prices — and a plunging share price.

While Origin has reduced its net debt to $9.1bn, from more than $13bn, there are those who have been advocating a spin-off of the APLNG exposures along with the other upstream interests that will now be spun-off in NewCo.

Those assets, with their direct exposure to international oil and gas prices, are exposed to far greater volatility that Origin’s retailing and generation businesses.

A hiving off of the coal seam gas resources and the APLNG stake might still occur in the future. King himself acknowledged that option, while preferring a decision be made at some later point when APLNG had greater maturity and profitability.

The more limited divestments announced today will make Origin a somewhat simpler business and enable it to reduce its debt further, which was Calabria’s stated initial priority.

It will also reduce the capital intensity of the group, with Origin’s chairman, Gordon Cairns, saying that its ability to invest in the NewCo assets had been constrained. Conversely, the IPO would enable an independent NewCo to support their long-term value.

The assets to be bundled into NewCo include Origin’s Australasian interests in the Otway, BassGas and Kupe projects, as well as interests in the Perth, Cooper, Bonaparte and Canterbury basins. They are all assets focused on the domestic market.

Apart from its APLNG exposures, Origin will retain its interests in the Ironbark project in the Surat Basin, as well as its offshore Browse (WA) and Beetaloo (NT) basin exposures, which are geared to international markets.

The oil price environment in which NewCo is launched appears likely to be significantly more positive than it has been over the past two-and-a-half years after OPEC’s agreement last week, with some key non-OPEC producers, to reduce production.

That has seen the oil price rocket up from about $US46 a barrel to more than $US54 a barrel, lifting Origin’s share price (ORG) to its highest levels for about 15 months.

If the recovery in oil prices over the past week can be sustained, NewCo — which Origin said would be a “mid-cap” production and exploration company — would probably have a market capitalisation of more than $1.5bn.

That would give Calabria a flying start to his ambition of deleveraging Origin and giving him some more positive options for shaping Origin’s future. Today his balance sheet constrains his ability to invest.

A successful spin-out of NewCo would also be a statement of future directions.

It says quite strongly that Calabria wants to focus on the stable energy markets businesses and that at some more favourable point the “other” much larger and far more volatile upstream exposures — APLNG and the unconventional gas resources that support it — will also be sold off or spun out.

That’s now a question of timing and the optimising of value rather than whether or not it occurs.