Origin Energy Ltd (ASX:ORG) shares have slumped by more than 10% since reporting a record annual profit yesterday.
The company reported that statutory profit for the full year ended 30 June 2024 was A$1,397 million, an increase from A$1,055 million in the previous year. Underlying profit rose to A$1,183 million, up A$436 million year-on-year, primarily driven by higher earnings in the Energy Markets and Integrated Gas businesses. Underlying EBITDA increased to A$3,528 million, compared to A$3,107 million in the prior year.
Origin received cash distributions from Australia Pacific LNG totalling A$1,384 million. After accounting for Origin's oil hedging, net cash distributions amounted to A$1,367 million.
Adjusted free cash flow reached A$1,296 million, up from A$965 million in FY23, supported by stronger earnings from Energy Markets, although this was partially offset by a lower distribution from Australia Pacific LNG due to decreased commodity prices.
The Board has declared a fully franked final dividend of 27.5 cents per share.
“Origin’s operational and financial performance highlights the benefits of the company’s diverse portfolio, with higher earnings from Energy Markets and LNG trading more than offsetting lower earnings from Australia Pacific LNG and Octopus Energy,” CEO Frank Calabria said.
“Origin’s balance sheet remains strong, with good cash generation supporting an increase in returns to shareholders and enabling capital to be reinvested into renewables and storage as we accelerate execution of our strategy.
“We are acutely aware of the pressure on household budgets at this time given the rising cost of living and recognise the role we play in providing reliable and affordable energy for customers. We welcome energy bill relief for all households provided by federal and state governments, with Origin’s focus on supporting our most vulnerable customers with $100 million committed across FY24 and FY25, including to freeze tariffs for these customers.”
Cheap coal and renewable energy drives profits
Origin’s profits were driven by the benefits of cheap coal and reduced renewable energy generation, but its shares dropped over 10% following a warning that the performance of its energy business would decline.
This outlook has overshadowed the results, which some shareholders might have viewed as validation for rejecting Brookfield and EIG’s near A$20 billion takeover bid last year.
Calabria attributed the expected decline to increased coal costs and decreased revenue from households and businesses, although these would be partly offset by the performance of the LNG business and Origin’s stake in British company Octopus Energy.
“Electricity profits are expected to decrease as tariffs reprice to reflect lower wholesale costs and retail margins, and on higher coal procurement costs. At Octopus Energy, earnings are expected to increase while Australia Pacific LNG production is expected to continue to perform well,” Calabria stated.
The decline in revenue is anticipated to be driven by Origin’s coal-fired generator Eraring, which was a significant contributor to the 2024 profits. Earlier this month, Origin reported that output from New South Wales’ largest electricity generator had reached a five-year high, capitalising on the coal cap implemented by federal and state governments to reduce household and business bills.
With global energy markets stabilising after record highs, the coal cap has now expired, and Calabria noted that Origin would now face an increase of around A$30 per tonne of coal.
As costs rise, retailers like Origin will receive less from households and businesses, following the Australian Energy Regulator’s earlier directive that annual tariffs must fall as electricity generation costs decrease.
Disappointing dividend increase
Origin’s shares fell to A$9.60, down 9.43%, even as the company raised its dividend. The final dividend will be 27.5 cents per share, fully franked, up from 20 cents last year.
The dividend increase was disappointing to some shareholders who had anticipated higher returns. Origin is currently balancing its transition to renewable energy with rewarding investors, supported by its LNG export business and its investment in Octopus Energy.
Origin holds a minority interest in the Australia Pacific LNG project, one of the country’s largest LNG exporters, and a 23% stake in Octopus Energy, one of the world’s fastest-growing energy companies. The company expects Octopus to generate between A$100 million and A$200 million in the next financial year, up from A$55 million last year.
These revenue streams will enable Origin to develop the 4-5 gigawatts of renewable energy it has committed to delivering. Several battery projects totalling 1.5 gigawatts are also in the works, with further developments underway in South Australia. New wind and solar projects are also expected to receive funding from external partners.