Origin Energy stung by gas price ruling, slashes earning forecast

Origin Energy has been forced to revise down its earnings forecasts after losing a ruling on one of its key gas purchase contracts that could cost the company as much as $120 million in earnings over the next two years.

In a statement to the ASX on Friday, Origin Energy said that its contract for the purchase of gas from Beach Energy’s Otway Basin, which allows for regular reviews of the gas price to be paid by Origin, had been referred to arbitration and that a decision had not gone Origin’s way.

Origin will now face higher than expected costs for the gas from Otway, amounting to a higher expense of between $30 and $40 million in the 2021 financial year.

This cost blowout will increase to $60 to $80 million in 2022.

“We are disappointed in this decision which we believe is wrong, and entirely inconsistent with our prior experience in the gas market. This will result in a gas price that does not reflect market prices, and it is therefore a very poor outcome,” Origin Energy CEO Frank Calabria said.

In its own statement to the ASX, Beach Energy revealed that the gas price review would see Origin Energy pay somewhere in the vicinity of $9.30 per gigajoule – reflecting the high prices seen between 2018 and 2019 – a significant premium to the current gas spot price of around $6 per gigajoule.

“Beach is pleased with the outcome of the price review process, which has been independently conducted and, as required by the contract, determined a price consistent with the market price of comparable contracts,” Beach Energy CEO Matt Kay said.

“This pricing range is necessary to ensure continued development of supply within the East Coast gas market, which is facing significant supply shortfalls in the coming years.”

It’s a double whammy for Origin Energy which, in addition to facing higher gas purchase costs, has also taken a dent to revenues as a result of a fall in wholesale electricity prices.

It underlines the perils of assuming that the Morrison government’s ‘gas led recovery’ push will lead to lower gas prices. As ACCC chair Rod Sims has repeatedly pointed out, Australia’s east-coast gas market is in serious dysfunction, where prices being paid by consumers no longer reflect the normal principles of supply-demand dynamics.

Origin’s experience serves as an example of what a growing number of energy market analysts have suggested; increasing Australia’s reliance on gas will ultimately lead to high overall energy costs.

Origin said that forward electricity prices had dipped by around $20 per MWh over the last year, impacting revenues from the Eraring coal fired generator, and its sizeable gas generation portfolio – including the Mortlake gas generator, which sources gas from the Otway basin.

Following the result, Origin issued a revised earnings guidance for its energy markets business of between $940 to $1,020 million for the financial year, down from the $1,000 to $1,140 million guidance issued just two months ago during the company’s half year results announcement.

Origin said that subdued energy demand and lower wholesale electricity prices, combined with lower dividends from its investment in customer management software company Octopus Energy, had contributed to the lower forecast earnings.

Meanwhile, Origin said that it expected better revenues from its share in Australia Pacific LNG, flowing from higher production output. But the expected dividend from that venture is still expected to be around half the $1.275 billion received in the 2020 financial year.

Origin Energy shares fell by more than 8 per cent in Friday trading, following today’s announcement.

Conversely, shares in Beach Energy, as the beneficiary of the pricing decision, were up by more than 4 per cent.

It is another setback for the energy giant, which has struggled to deal with the fall out of a collapse in global gas prices while being stuck with gas purchase contracts fixed at comparatively high prices.

Origin Energy has previously disclosed that it had encountered an “onerous contract provision” relating contract to the purchase of gas from the US-based Cameron LNG.

Origin said in a statement last year that it could record a loss of between $440 and $460 million on gas purchases from the US project after it failed in a quest to arbitrage the Asian and US gas markets.

Origin said that it would continue to focus on achieving cost reductions across its energy business, including by transitioning more of its customers onto the ‘Kraken’ customer management platform, which is expected to streamline its customer experience and lower costs.