Australia’s third biggest energy company by market cap, Origin Energy Ltd (ASX: ORG), has lost more than half its value this year, with the share price slumping 52% year to date (YTD).
The dismal performance of Origin Energy’s share price is largely in line with the broader energy sector’s performance, in which the ASX 200 Energy Sector Index (ASX: XEJ) has lost more than 45% YTD.
Australia’s other two biggest energy companies have also done miserably in 2020, with Woodside Petroleum Limited (ASX: WPL) falling by 49% YTD, and Santos Ltd (ASX: STO) slumping by 42%.
What’s dropping the Origin Energy share price?
Needless to say, Origin Energy has been a casualty of the big slump in demand for energy this year as the coronavirus pandemic stopped the world dead in its tracks.
As a commodity producer, Origin Energy is a price taker and therefore its earnings closely track the price of Brent crude oil, which has fallen to under US$40 from nearly US$70 a barrel at the start of 2020.
Understanding Origin Energy’s business
Before deciding to buy shares in a company, it’s imperative that you as an investor have a basic understanding about what the company does, and how it makes money. Only then will you get a sense of the risk of the investment you are about to make.
Let’s take a look at Origin’s Energy’s business model.
Origin Energy has two main revenue sources – Australian energy retail, and liquified natural gas (LNG) export.
In the retail business, Origin Energy is one of three energy retailers in Australia controlling 80% of the market. The other two being Energy Australia and AGL Energy Limited (ASX: AGL).
The retail business is relatively stable where each of the three players essentially owns similar percentages in market share. The retail energy market in Australia is also highly regulated, so significant future growth from this segment might be unlikely.
Origin Energy’s LNG business on the other hand, is a volatile yet potentially highly lucrative business. It owns 37.5% stake in a company called Australia Pacific LNG (APLNG), which is a major liquefied natural gas exporter in Queensland.
APLNG has a contract in place to export 8.6 million metric tons per year to Asian customers for the next 20 years, with the price linked to the volatile Brent crude oil price.
Can Origin Energy recover from the slump?
On Friday 30 October, the company announced that its FY21 first-quarter revenue from its stake in the APLNG project fell 46%, as a result of lower prices for its oil and gas exports.
This demonstrates that the key to the Origin Energy share price recovery will need to come from a recovery in the oil price to pre-COVID-19 levels.
There’s some bad news, however. A group of 10 investment banks in the US recently polled by The Wall Street Journal forecast that Brent crude oil price will only average $53.50 a barrel by the end of 2021 – far below the pre-COVID levels.
The decision on whether or not to invest in Origin Energy, at least in the short term, comes down to a call on the movement in the oil price. The Origin Energy share price is trading up 0.5% to $4.02 at the time of writing.
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Returns as of 6th October 2020
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Motley Fool contributor has no positions in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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