The integrated-energy company Origin Energy Limited (ASX:ORG) announced that it has taken measures to limit its exposure to the decline in oil prices.
Origin will be purchasing put options on oil (also known as Oil Puts) for FY17 and forward sell LNG cargoes at a fixed price. Both the transactions aim to mitigate the company’s exposure to oil prices on volumes Australia Pacific LNG sells under existing contracts and to spot LNG prices on volumes above contracted commitments.
The Oil Puts will provide Origin the right to sell 15 million barrels of Japan Customs-cleared Crude (JCC) at a strike price of A$55 per bbl for 75 percent of the volume and US$ 40 per bbl for 25 percent of the volume. Origin will pay $82 million for the cost of Oil Puts and will expense it in Underlying Profit for FY17. Any financial effect of Oil Puts will also be recognised in Underlying Profit for the year. Origin notes that the volume under the Oil Puts represents a reasonable balance between the ‘risk versus reward’ aspect of the contract.
Origin Managing Director Grant King elucidated the need for the measures taken: “With the continued decline in oil prices, Origin has acted to reduce the potential requirement for the company to make additional contributions to Australia Pacific LNG above the $1.8 billion of remain contributions announced in August 2015. If, for example, oil prices fall to US$20 per bbl for the entire 2017 financial year, with the benefit of the Oil Puts, the additional contribution that Origin would have to make to Australia LNG would be around $200 million.”
Mr. King also stated that Origin continues to work with Australia Pacific LNG to reduce operating and capital costs in order to ultimately bring down the entity’s cash-cost breakeven price and further improve their ongoing project’s resilience in a low oil price movement.
ORG opened 2.2% higher at $4.56 as at 10:10 (AEDT). The stock is down approximately 56% for the year as it faces headwind from lower oil prices.
Author: Simon Herrmann
Dec 22, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.