(ORG) Energy Transition Leader at Inflection Point with Growing Battery Portfolio
Origin Energy (ASX:ORG)
Current Share Price: $10.29 | Target Price: $11.50 | April 2025
I'm leaving out the investor profile snapshot report for the time being, prioritising the roll out of more company research first. Will still include the above rating system.
Investor Profile Snapshot
INCOME: ★★★ 75% | VALUE: ★★☆ 65% | GROWTH: ★★☆ 60% | QUALITY: ★★★ 70% | THEMATIC: ★★★ 75%
Note: This report provides analysis and commentary based on public information and is not intended as investment advice. Investors should conduct their own research and consult with financial advisors before making investment decisions.
In-depth report/analysis on ORG can be found in the following PDF file:
Executive Summary
Origin Energy is at a pivotal inflection point in its transformation from a traditional integrated energy company to a diversified energy platform with significant clean energy capabilities. The company delivered solid financial results in FY24 with underlying profit increasing 58% to $1,183 million, though the 2% decline in revenue to $16,138 million reflects normalizing energy market conditions. The Energy Markets segment demonstrated notable recovery with EBITDA rising 59% to $1,655 million as higher wholesale costs were successfully recovered following previous under-recovery periods. Integrated Gas remained resilient with EBITDA increasing 2% to $1,951 million despite lower commodity prices, supported by APLNG production growth of 3% to 694 PJ and improvements in hedging and trading activities.
The company is approaching a significant transformation in its business mix and financial metrics, with approximately $1.7 billion committed to owned battery storage projects and targets to add 4-5 GW of renewables and storage to its portfolio by 2030. These investments, while creating near-term earnings headwinds, position Origin in Australia's energy transition landscape. The Energy Markets segment is expected to normalize in FY25 with EBITDA guidance of $1,100-1,400 million as lower wholesale costs flow through to regulated tariffs, before recovering as battery investments contribute to earnings from FY26-27 onwards.
Beyond traditional energy operations, Origin continues to expand its technology capabilities through its 23% stake in UK-based Octopus Energy, which now serves over 15 million customers globally with its Kraken platform supporting over 62 million accounts. While Octopus represents a near-term earnings drag, it may provide long-term growth potential. The company's Origin Loop virtual power plant has expanded 70% year-over-year to 1.45 GW of connected capacity, demonstrating execution in distributed energy orchestration.
With a balanced approach spanning traditional energy, emerging storage and renewables, and innovative technology platforms, Origin presents a differentiated exposure to the energy transition, supported by APLNG cash flows and a robust balance sheet with adjusted net debt to EBITDA of 1.0x as of FY24. The company's strategic positioning reflects its response to the challenges facing the Australian energy market during its decarbonization journey.
Financial Highlights
| Key Metrics ($m) | FY2024 | FY2023 | YoY Change |
|---|---|---|---|
| Revenue | $16,138 | $16,481 | -2% |
| Underlying EBITDA | $3,528 | $3,107 | +14% |
| Underlying Profit | $1,183 | $747 | +58% |
| Statutory Profit | $1,397 | $1,055 | +32% |
| Energy Markets EBITDA | $1,655 | $1,038 | +59% |
| Integrated Gas EBITDA | $1,951 | $1,919 | +2% |
| Share of Octopus Energy EBITDA | $55 | $240 | -77% |
| Operating Cash Flow | $1,114 | ($633) | +$1,747m |
| Adjusted Free Cash Flow | $1,296 | $965 | +34% |
| Total Dividends per Share | 55.0 cents | 36.5 cents | +51% |
Financial Forecasts
| Income Statement ($m) | FY24A | FY25E | FY26E | FY27E | FY28E | FY29E |
|---|---|---|---|---|---|---|
| Revenue | 16,138 | 15,654 | 15,350 | 16,118 | 16,924 | 17,770 |
| Growth (%) | -2.1% | -3.0% | -1.9% | +5.0% | +5.0% | +5.0% |
| EBITDA | 3,528 | 3,200 | 3,150 | 3,400 | 3,800 | 4,150 |
| EBITDA Margin (%) | 21.9% | 20.4% | 20.5% | 21.1% | 22.5% | 23.4% |
| Depreciation | 458 | 470 | 500 | 540 | 580 | 600 |
| EBIT | 3,070 | 2,730 | 2,650 | 2,860 | 3,220 | 3,550 |
| EBIT Margin (%) | 19.0% | 17.4% | 17.3% | 17.7% | 19.0% | 20.0% |
| Net Profit | 1,183 | 1,100 | 1,050 | 1,200 | 1,400 | 1,650 |
| EPS (cents) | 68.7 | 63.9 | 61.0 | 69.7 | 81.3 | 95.8 |
Key Outlook Points
- Energy Markets EBITDA expected to normalize to $1,100-1,400 million in FY25 (from $1,655 million in FY24) as lower wholesale costs flow through to regulated tariffs
- Battery investment program of approximately $1.7 billion includes the 700 MW/2,800 MWh Eraring battery and 240 MW/480 MWh Mortlake battery, with staged completion through FY26-27
- Capital expenditure to increase to $1.5-1.7 billion in FY25, primarily for battery projects, before declining as projects complete
- LNG trading gains expected toward upper end of $400-450 million range in FY25, normalizing to $50-150 million from FY26 onwards
- Cost efficiency initiatives targeting $100-150 million reduction in cost to serve by FY26 compared to FY24
- Octopus Energy contribution expected to transition from up to $100 million in FY25 to $300-400 million by FY28-29 as scale benefits emerge
- U-shaped earnings trajectory anticipated as battery projects reach completion and begin generating returns, with leverage expected to temporarily increase to 1.8-2.0x in FY26
Valuation Summary
Our base case valuation of $11.50 per share represents 11.8% upside to the current price. This valuation is derived using a weighted average of three complementary methodologies: discounted cash flow, multiple-based analysis, and precedent transactions.
| Methodology | Implied Price Per Share |
|---|---|
| DCF - Base Case | $11.50 |
| DCF - Bull Case | $14.25 |
| DCF - Bear Case | $8.75 |
| EV/EBITDA Multiple - NTM | $12.50 |
| P/E Multiple - NTM | $10.80 |
| PEG Ratio (P/E to Growth) | $11.25 |
| Precedent Transactions | $12.75 |
| Implied Valuation Range | $10.50 - $13.00 |
| Current Share Price | $10.29 |
| Up/Downside to Base Case | +11.8% |
Key explicit assumptions in our base case include:
- U-shaped earnings trajectory with revenue declining 3% in FY25 and bottoming in FY26 before returning to 4-5% growth by FY29
- EBITDA margins contracting to 19-20% in FY25-26 before expanding to 23-24% by FY29
- Capital expenditure front-loaded at $1.5-1.7 billion in FY25 (9-10% of revenue), normalizing to 6.5% by FY28-30
- APLNG production stabilizing around 670-690 PJ annually with long-term oil price of $80/bbl
- Octopus Energy transitioning from minimal contribution in FY25 to $300-400 million by FY28-29
- WACC of 9.5% with terminal multiple of 6.5x EV/EBITDA
Key Tailwinds
Battery Investment Growth: Origin has committed approximately $1.7 billion to owned battery storage projects, establishing a position in Australia's developing storage market. These assets are positioned to operate in an environment of energy market volatility as coal retirements accelerate and renewable penetration grows. The 700 MW/2,800 MWh Eraring battery represents one of Australia's largest storage projects, benefiting from existing grid connection infrastructure that provides cost advantages over new developments. Revenue sources for these investments include energy arbitrage, frequency control ancillary services (FCAS), and capacity payments through government support mechanisms like the Capacity Investment Scheme.
Virtual Power Plant Development: Origin has established a position in distributed energy orchestration through its Origin Loop virtual power plant, which has expanded 70% year-over-year to 1.45 GW of connected capacity. This platform integrates home batteries, solar systems, electric hot water, and smart devices, creating a capability in the evolving distributed energy landscape. The VPP platform enables Origin to optimize energy usage across its customer base, potentially reducing wholesale energy costs, providing grid stabilization services, and enhancing customer retention through additional services. As Australia's energy system becomes increasingly decentralized, Origin's early activity in this space positions it to participate in orchestration capabilities, with the potential to scale to 2.5-3.0 GW by FY29.
Octopus Energy Position: Origin's approximately 23% stake in Octopus Energy provides growth potential that domestic competitors lack. Octopus has achieved customer growth, serving over 15 million accounts globally (up 35% in FY24), while its Kraken technology platform supports over 62 million accounts (up 60% in FY24). While Octopus represents a near-term earnings drag (FY25 contribution expected to be up to $100 million), its scaling creates potential long-term value as the business transitions from growth-focused investment to profitability. As Octopus achieves scale benefits, Origin's share could contribute $300-400 million to EBITDA by FY28-29, creating a growth vector beyond domestic operations.
APLNG Cash Flow Contribution: Despite lower commodity prices, Origin's 27.5% stake in APLNG continues to deliver cash distributions ($1,384 million in FY24) that fund the company's transition investments. APLNG production increased 3% in FY24 to 694 PJ, reflecting well and field optimization efforts, with guidance of 670-690 PJ for FY25 demonstrating operational stability. The project benefits from low unit production costs and approximately 90% of LNG volumes contracted on long-term agreements, providing cash flow visibility despite commodity price changes. While long-term earnings from APLNG will likely plateau, the projected $1.0-1.2 billion annual distributions through FY29 provide funding for growth initiatives and shareholder returns.
Energy Transition Positioning: Origin has positioned itself within Australia's energy transition, with an approach that spans traditional energy sources, batteries and renewables, and customer solutions. The scheduled closure of Eraring Power Station in August 2027 (extended from 2025) demonstrates management of the coal exit timeline, balancing system reliability needs with decarbonization objectives. This extension agreement includes government support through the Generator Engagement Project Agreement, providing financial protection during the transition. Meanwhile, Origin's diversified growth strategy targeting 4-5 GW of renewables and storage by 2030, including the recently acquired Yanco Delta Wind Farm (1.5 GW potential), aligns with Australia's accelerating renewables adoption.
Key Headwinds
Energy Markets Earnings Normalization: After strong performance in FY24 with EBITDA of $1,655 million (up 59% year-over-year), Origin's Energy Markets segment faces near-term adjustments as earnings normalize. Management expects FY25 EBITDA to decline to $1,100-1,400 million, reflecting lower wholesale costs flowing through to regulated retail tariffs (approximately $20/MWh reduction) and higher coal costs (approximately $30/tonne increase) following the end of price caps. This earnings moderation creates a drag on group performance during FY25-26, with retail margins facing pressure from competitive intensity and regulatory scrutiny. The company's cost to serve increased substantially by 40% in FY24, driven by higher bad debts, temporary additional resources post-Kraken migration, and increased regulatory compliance costs, necessitating the $100-150 million cost reduction initiative targeted for FY26.
Execution Risk in Battery Deployment: Origin's battery investment program, with approximately $1.7 billion committed to date, introduces execution risk across multiple dimensions. These large-scale battery projects face potential challenges including grid connection delays, equipment supply constraints, construction complexities, and evolving market rules that could impact revenue models. The concentrated nature of these investments (primarily at Eraring and Mortlake) creates location-specific risks, while the rapidly evolving battery storage technology landscape introduces obsolescence considerations for long-duration assets. Competition for grid capacity and market share in flexibility services is increasing as other developers and utilities pursue similar strategies, potentially affecting projected returns.
Commodity Price Volatility: Despite diversification efforts, Origin retains exposure to oil and LNG price fluctuations through its 27.5% stake in APLNG. A $10/bbl change in oil price impacts annual EBITDA by approximately $200-250 million, creating earnings sensitivity to factors beyond management control. While current commodity prices support cash distributions, potential weakness would constrain both transition investments and shareholder returns. The company faces near-term uncertainty from the Sinopec price review of its long-term LNG supply contract, with a 1% contract slope change representing approximately A$110-130 million annual EBITDA impact. Additionally, Origin's LNG trading gains ($400-450 million expected in FY25) are acknowledged as unsustainable, with management guiding to a normalization to $50-150 million from FY26 onwards.
Tri-Star Litigation Risk: APLNG faces litigation risk from Tri-Star's claims that reversion has occurred on Coal Seam Gas interests representing approximately 19% of APLNG's 2P reserves. If Tri-Star's claims are successful, APLNG would transfer a 45% interest in these CSG interests to Tri-Star for no additional consideration, potentially requiring alternative gas supplies to meet contracted commitments. The financial exposure is substantial – Tri-Star has claimed up to $14.6 billion in "market value" compensation under certain scenarios. While Origin maintains a defense position, legal proceedings are inherently unpredictable, and the timing of resolution remains uncertain. This contingent liability represents a risk that may not be fully reflected in market expectations.
Technology Transformation Challenges: Origin's strategic pivot toward digital customer solutions (Kraken platform, Origin Loop VPP) exposes the company to technology implementation risks. The Kraken implementation experienced initial challenges requiring stabilization, highlighting execution risks in complex system migrations. Cost to serve increased 40% in FY24, partially due to temporary additional resources required during the Kraken transition period. As distributed energy resources under management grow (1.45 GW in HY25), the sophistication of orchestration requirements and cybersecurity threats increases proportionally. Meanwhile, the company's investment in Octopus Energy carries risk characteristics, with international expansion and newer business lines requiring substantial investment before reaching profitability.Competitor Analysis
| Competitor | Competitive Positioning |
|---|---|
| AGL Energy | Australia's largest electricity generator with higher thermal capacity; Greater coal exposure through Loy Yang A (operating until 2035); Slower-moving transition strategy but higher near-term dividends; Lower relative cost-to-serve; No international growth platform comparable to Octopus; Market share: 30-35% electricity retail |
| EnergyAustralia | Foreign parent (CLP) backing provides financial strength; Similar transition strategy but less innovation focus; Challenged retail profitability with smaller scale; Limited gas infrastructure; No international exposure; Market share: 15-20% electricity retail |
| Santos | Larger oil and gas portfolio with greater production growth outlook; Significant international diversification beyond Australia; Higher emissions intensity; Limited exposure to electricity markets; No retail integration; Market share: 30-35% of east coast gas production |
| Woodside Energy | Scale advantage post-BHP merger; Stronger balance sheet; Global LNG portfolio; No domestic retail operations; Highest emissions intensity; Limited renewables investment; Market share: Minimal east coast gas; 20-25% of Australian LNG exports |
Key Project Status
| Project | Status | Strategic Importance |
|---|---|---|
| Eraring Battery (700 MW / 2,800 MWh) | Under construction | Largest battery in portfolio; Utilizes existing grid connection; Four-hour dispatch duration provides both energy arbitrage and capacity value; Staged completion FY26-27 |
| Mortlake Battery (240 MW / 480 MWh) | Under construction | Co-located with gas peaking plant; Two-hour dispatch duration focused on FCAS and peak capacity; Leverages existing infrastructure; Completion FY26 |
| Supernode Battery | Development | Power purchase agreement structure diversifies development approach; Provides additional flexibility without direct capital commitment; Completion FY26 |
| Yanco Delta Wind Farm | Development | Large-scale development project with 1.5 GW potential capacity; Key component of 4-5 GW renewables and storage target by 2030; Timeline 2027-30 |
| Origin Loop (Virtual Power Plant) | Operational | Currently 1.45 GW of connected capacity (+70% YoY); Targeting 2.5-3.0 GW by FY29; Integrates home batteries, solar systems, and smart devices |
| Eraring Power Station | Operational | 2.9 GW black coal plant; Extension from original 2025 timeline provides transition period; GEPA agreement with NSW government provides financial support; Closure August 2027 |
Cash Flow & Balance Sheet
| Key Metrics | FY24A | FY25E | FY26E | FY27E | FY28E | FY29E |
|---|---|---|---|---|---|---|
| Operating Cash Flow | 1,114 | 1,400 | 1,500 | 1,600 | 1,800 | 2,000 |
| Capital Expenditure | 608 | 1,649 | 1,150 | 1,190 | 1,150 | 1,205 |
| Free Cash Flow | 1,296 | (100) | 470 | 565 | 825 | 970 |
| APLNG Distributions | 1,384 | 1,050 | 1,100 | 1,150 | 1,200 | 1,200 |
| Dividends | 819 | 770 | 735 | 840 | 980 | 1,155 |
| Adjusted Net Debt | 2,833 | 3,703 | 3,968 | 4,243 | 4,398 | 4,583 |
| Adjusted Net Debt/EBITDA | 1.0x | 1.5x | 1.9x | 1.8x | 1.6x | 1.4x |
Operational KPIs
| Key Metrics | FY24A | FY25E | FY26E | FY27E | FY28E | FY29E |
|---|---|---|---|---|---|---|
| Energy Markets EBITDA | 1,655 | 1,250 | 1,200 | 1,350 | 1,550 | 1,750 |
| Integrated Gas EBITDA | 1,951 | 1,700 | 1,700 | 1,750 | 1,800 | 1,850 |
| Octopus Energy EBITDA | 55 | 100 | 150 | 200 | 300 | 400 |
| APLNG Production (PJ) | 694 | 680 | 675 | 670 | 670 | 665 |
| Battery Capacity (MW) | - | 200 | 700 | 1,700 | 1,700 | 1,700 |
| Origin Loop Capacity (GW) | 1.45 | 1.65 | 1.85 | 2.10 | 2.35 | 2.60 |
| Underlying ROCE (%) | 15.2% | 13.5% | 12.5% | 14.0% | 15.5% | 17.0% |
Analysis Summary
Based on our valuation analysis and assessment of Origin's strategic positioning, the data points to moderate share price appreciation potential, with our model indicating a fair value of $11.50 per share (11.8% upside).
Key factors supporting this view include:
- Strong financial foundation from APLNG cash distributions providing funding for transition investments
- Strategic positioning across the energy transition with battery, renewables, and virtual power plant capabilities
- Long-term growth potential from Octopus Energy stake as the business scales internationally
- Attractive dividend yield of 5.3% at current prices despite near-term moderation
However, investors should consider key risks including:
- Near-term earnings normalization in Energy Markets segment creating a temporary growth headwind
- Execution challenges in the battery investment program with $1.7 billion committed capital
- Commodity price volatility affecting APLNG cash distributions
- Litigation risk from Tri-Star claims against APLNG's Coal Seam Gas interests
Origin's transformation journey appears to be at an inflection point, with significant investments in battery storage and renewables positioning the company for the energy transition. Our analysis suggests the current valuation may be slightly underpricing the long-term potential from successful execution of this strategy, though near-term earnings moderation is likely to constrain immediate share price performance.
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