On Wednesday, Goldman Sachs (NYSE:GS) adjusted its stance on shares of Origin Energy Ltd. (ORG:AU) (OTC: OGFGY), downgrading the company's stock rating from Buy to Neutral. The firm also set a new price target of AUD10.40, a slight increase from the previous AUD10.30.
The revision comes after a period of notable performance for Origin Energy, with its shares having risen by 17% over the past five months, despite a disappointing fiscal year 2024 outcome that saw the company fail to meet its cost-saving targets of A$200-250 million from a fiscal year 2018 baseline. The company, currently valued at $11.88 billion, maintains a strong financial health score according to InvestingPro analysis.
The shares of Origin Energy have also increased by 5% since July 2024, with a remarkable 26.27% gain over the past year. Goldman Sachs' analysts attribute the downgrade to the company's current valuation, suggesting that the price target now indicates a potential 7% downside. However, this is somewhat mitigated by a 4.52% dividend yield.
The analysts note that Origin Energy is poised to benefit from the recent surge in oil prices, which have reached US$80 per barrel, surpassing Goldman Sachs' average estimate of US$76 per barrel for 2025. InvestingPro analysis suggests the stock is currently undervalued, trading at an attractive P/E ratio of 13.8x.
Despite the potential benefits from high oil prices, Goldman Sachs' commodity team expects that OPEC+ has sufficient spare capacity to balance any supply disruptions from increased sanctions on Russian and Iranian oil supplies.
If the current spot oil prices persist throughout 2025, the analysts project only a 1% improvement in Origin Energy's sum-of-the-parts (SOTP) valuation to AUD10.50 per share, which still trails behind the company's present market valuation. InvestingPro subscribers can access additional insights, including 6 more ProTips and detailed financial metrics that could help evaluate the company's prospects in various oil price scenarios.
Furthermore, Goldman Sachs highlighted risks concerning the fiscal year 2025 consensus cash flow and valuations for Origin Energy. The company indicated in October that it anticipates a significant increase in tax payments for the year, driven by higher installment rates and the deferred tax associated with increased earnings from fiscal year 2024.
Goldman Sachs estimates that the cash tax paid in fiscal year 2025 could reach A$1 billion, compared to A$0.63 billion in fiscal year 2024, and above the consensus estimate of A$0.68 billion. This discrepancy suggests a potential 2% downside risk to the consensus valuations for Origin Energy, though the company maintains a moderate debt level with a debt-to-equity ratio of 0.36.
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