Origin Energy, Buoyed by Cash, Seeks Acquisitions

By Angela Macdonald-Smith

Feb. 26 (Bloomberg) -- Origin Energy Ltd., the Australian electricity and gas retailer that last year attracted a $5 billion investment from ConocoPhillips, said it’s seeking acquisitions that will yield higher returns than cash.

The company has A$6.4 billion ($4.2 billion) in cash and un-drawn debt and “could spend A$2 billion easily on the right sorts of opportunities,” Managing Director Grant King said today. Origin would be interested in Woodside Petroleum Ltd.’s Otway gas venture stake, in power assets to be sold by New South Wales state or in renewable energy or coal assets, he said.

Origin today terminated a A$1.3 billion share buyback program as it bolsters funds for acquisitions and a liquefied natural gas venture planned with Houston-based ConocoPhillips. The debt capital markets, which have seen an “enormous” deterioration, show no signs of improvement and demand the company acts “cautiously” on its funding, King said.

“There are clearly assets out there they want to buy, the challenge is they’re not quite sure how much money they need for the LNG,” said Stuart Baker, an energy analyst at Morgan Stanley in Melbourne.

Origin dropped 13 cents, or 1 percent, to A$13.20 in Sydney trading, after reducing its full-year earnings forecast. The decline compared with a 2.9 percent gain in the Australian Stock Exchange’s benchmark energy index.

Origin has A$4.1 billion of cash on deposit, earning about 4 percent, said Frank Calabria, general manager for finance. That leaves scope for acquisitions that would yield higher returns, King said.

‘Add to Growth’

“The company is in a position to add extraordinarily to growth,” King told reporters on a conference call. “Even if you bought assets yielding 10 percent you’d add A$300 million or so to profits.”

Origin would consider acquiring a coal-fired power plant, especially should it be successful in buying one of the power retailers due to be sold by New South Wales state, King said in an interview. It’s also in talks on a carbon disposal project in Queensland, he said.

Origin today cut its forecast gain in full-year profit, citing lower interest rates, a drop in crude-oil prices and lower earnings from a unit in New Zealand.

Profit before one-time items in the year ending June 30 is expected to climb by between 20 and 25 percent, down from an October estimate of as much as 40 percent, Sydney-based Origin said today in a statement. First-half profit rose 38 percent, while net income surged 20-fold to A$6.66 billion, buoyed by the sale of 50 percent of its coal-seam gas unit to ConocoPhillips.

Interest ‘Headwinds’

The Sydney-based company made a A$6.4 billion one-time gain in the first half on the asset sale.

Profit before one-time items rose to A$276.9 million in the six months ended Dec. 31, beating a A$248 million median estimate of five analysts surveyed by Bloomberg News.

Deutsche Bank AG predicted the reduced full-year earnings outlook in a Feb. 16 report, citing “headwinds from lower interest rates reducing interest income, Contact Energy’s profit downgrade and lower oil prices.” It estimated a 20 percent increase in profit.

ConocoPhillips and Origin have started a A$2.3 billion program to prepare for a final investment decision about their Australia Pacific LNG project in Queensland in late 2010, King said.

Rival Projects

The Origin/ConocoPhillips venture is one of five rival LNG projects planned for the Gladstone region on Queensland’s central coast. Plants proposed by BG Group Plc and by a venture between Santos Ltd. and Malaysia’s Petroliam Nasional Bhd. are scheduled to get the go-ahead and start production before Origin’s. The Australian company is “open” to consolidation in the industry, King said.

“Origin’s progress is being measured against rival projects from BG and Santos, both of which we believe are substantially more advanced on the downstream component,” Credit Suisse Group said yesterday in a report.

Origin’s oil and gas business recorded higher earnings in the first half, driven by the start-up of projects off Australia’s southeast coast and in New Zealand. Earnings also climbed at the retail unit, while profit fell from power generation and from Contact Energy.

Lower oil prices will reduce earnings in the second half, when exploration expenses will also be higher, Origin said.

Origin more than doubled its first-half dividend to 25 Australian cents a share and said the final dividend will at least match that.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net