What does Origin Energy do?
Origin Energy [ASX:ORG] is a vertically integrated energy company. It’s involved in the exploration and production of oil and gas, the production of electricity, and the wholesale and retail sale of electricity. For many years, investors viewed ORG as a stable, high-quality business.
But that changed with its foray into liquid natural gas (LNG), which resulted in a multi-billion dollar investment in a new LNG plant in Gladstone, Queensland. That investment, along with a collapse in the oil price which started in 2014, led to a massive fall in ORG’s earnings. This sent the share price plummeting.
What’s happening to the ORG share price?
The chart below shows the Origin Energy share price over the past two years. From a peak of just over $16 in 2014, the stock price fell to around $3.50 earlier this year.
This massive destruction of shareholder value has much to do with Origin’s investment in a new LNG plant. The board based the investment on the assumption that oil prices would remain high. They didn’t.
The fall below US$60 a barrel means most of these LNG plants can’t turn a profit, thanks to the massive upfront capital cost.
Another way of putting it is to say that Origin’s return on capital is less than its cost of capital. Whenever that happens, shareholder wealth is destroyed. Hence the massive fall in the share price.
What now for Origin Energy?
Is there any hope for Origin shareholders?
Yes there is. While the fundamentals don’t look particularly good for the company, oil prices may be close to a bottom. If this is the case, profitability will improve in the future.
If you look at the chart above, you can see that the Origin Energy share price has rebounded nicely from the lows. It’s now moving sideways. The share price will either break higher or lower from here. A break above the recent high, around $5.50, will be a positive sign and indicate the worst is over.
On the other hand, a break below the recent lows, around $4.75, will tell you that Origin is heading back towards $3.50.
When markets or stock prices are moving sideways, the best course of action is to do nothing. Wait for the market to tell you what to do. Don’t anticipate or guess. That’s just gambling.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.
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Editor, The Daily Reckoning