On Tuesday, Citi initiated coverage on Origin Energy Ltd. (ORG:AU) (OTC: OGFGY) with a Buy rating and a price target of AUD12.00. The firm highlighted Origin's advantageous position in the evolving Australian energy market, which is currently in a "mid-transition" phase. This phase is characterized by potential supply and demand dislocations as variable renewable energy (VRE) increases and coal exits, alongside a backdrop of inadequate firming capacity and impending gas shortages.
Origin Energy is poised to benefit from market volatility due to its legacy gas contracts, reserved pipeline capacity, a fleet of open cycle gas turbines (OCGTs), and its leading Virtual Power Plant (VPP). These assets enable Origin to capture arbitrage opportunities and potentially earn above-average returns in the semi-regulated retail market through competitive energy procurement costs.
Citi's endorsement of Origin as the "mid-transition champion" signals a belief that the company is well-equipped to navigate and profit from the ongoing shifts in the energy sector. The analyst's positive outlook is also supported by a more favorable valuation of Octopus, a part of Origin's business portfolio.
The analyst's statement underlines the expectation that consensus has not fully recognized the medium-term earnings potential of Origin's Energy Markets division. This outlook is a key driver behind Citi's Buy recommendation and the AUD12.00 price target set for Origin Energy's shares.
In other recent news, Origin Energy has maintained its Outperform rating from RBC Capital, following the company's announcement of an improved distribution policy. The energy firm has committed to a minimum payout of 50% of its underlying free cash flow, a significant increase from the prior range of 30-50%. This new policy is projected to boost the anticipated dividend yield to roughly 6% over the next three years.
In addition to this, Origin Energy's Kraken retail platform is entering a phase of value realization, a development that could potentially double the lifetime value of customers. The company's Australia Pacific LNG (APLNG) project, backed by a robust coal seam gas resource base, continues to perform strongly, supporting the company's goal of maintaining its supply cost at A$4 per gigajoule for the coming five years.
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