What is Happening to the Origin Energy Share Price?

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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.

origin energy stock price 31Mar16

Source: BigCharts

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.

If you’d like to know more, click here.

Greg Canavan
Editor, The Daily Reckoning

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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