Huge Origin write-down raises questions over Australia’s gas transition plan

Origin Energy is set to wear up to $1.2 billion in write-downs as a result of a collapse in global gas prices, as the company assesses the impacts of a Covid-19 affected economy on its LNG investments and as the massive write off of global fossil fuel assets has its impact in Australia.

In a statement to the ASX, Origin Energy said that it had been forced to write down the value of two of its LNG investments, after it was caught out by a sudden collapse in global gas prices.

It’s a substantial impairment for one of Australia’s largest energy companies, and undermines arguments being made within the Morrison government that Australia’s needs to embrace the gas industry to lead the Covid-19 economic recovery.

Industry analysts have warned that the Morrison government’s embrace of gas has been ill-advised, and fresh financial losses from Origin provide an indication of how much the gas sector itself has suffered from a Covid-19 triggered drop in energy consumption.

Origin said that it expected to write down the value of its 37.5 per cent stake in Australia Pacific LNG by between $720 and $770 million, blaming the collapse in global oil and gas prices for the loss.

Origin’s investment in the gas joint venture had assumed a prevailing oil price of US$60 per barrel. However, prices have traded well below US$45 per barrel for most of 2020 due to the combined impacts of Covid-19 caused reductions in demand and a Russian-OPEC oil price war.

With much of the Asian gas market tied to global oil prices, the oil price collapse had direct flow-on impacts for the value of gas exports from the Australia Pacific LNG joint venture.

Origin was forced to include revised assumptions around foreign exchange rates, which have been impacted by the Covid-19 related disruptions, contributing to the write-down.

Additionally, Origin cited an “onerous contract provision” relating contract to purchase gas from the US-based Cameron LNG, that would see Origin record an estimated loss of between $440 and $460 million.

In layman’s terms, “onerous contract provision” means that Origin is likely to lose money, at least in the short term, on an attempt to arbitrage the US and Asian gas markets.

Origin said that it had secured a long-term contract to purchase gas from Cameron LNG at US gas prices in 2013, with the first deliveries of gas to start this year. Origin Energy then planned to sell the gas into the Japanese-Korean gas market at a higher price.

Again, the collapse in global gas prices has seen Origin’s profit margin in the US to Asia gas deal disappear, leading to the write down of around $450 million.

In total, it will see Origin cop a hit to its statutory profits of between $1.16 billion and $1.23 billion across the two gas investments.

As these write downs relate to non-cash impairments to Origin, reducing asset values rather than income, Origin said that the losses would be reflected in their statutory profits, but there would be minimal impact on its underlying EBITDA, which it still expects to fall between $1.4 and $1.5 billion for the 2019-20 financial year.

Origin said that it would also write-off $25 to $35 million in bad and doubtful debts, relating to the potential impacts of Covid-19 on customers unable to pay their gas and electricity bills. The amount covers outstanding debts through to 30 June 2020, with the potential for further impacts in the following financial year if no additional government measures are introduced to help households with their energy costs.

“Origin has responded quickly to Covid-19 and the decline in commodity prices, reducing operating cost and capital expenditure, and these actions have improved resilience and helped to mitigate some of the impacts on our business,” Origin Energy CEO Frank Calabria said.

“These factors, and the broader macroeconomic environment, have contributed to our revised medium and long-term outlook for commodity prices.”

Origin added that if gas prices recovered, then the impacts on the company’s profits would be reduced.

Origin said that it would recover part of the lost value in the gas investments through a reduction in the funds set aside for the rehabilitation of its generator assets.

In the statement to the ASX, Origin said that it had identified up to $25 million in savings relating to the rehabilitation of the Eraring power station and that it had identified “a wide range of future commercial and industrial uses” for the site.

Origin has also set aside an extra $187 million for the rehabilitation of the 2,880MW Eraring power station, which is due to close by 2032, and an additional $62 million for the rehabilitation of its gas generators, which includes the 566MW Mortlake power station and the 664MW Uranquinty Power Station.