A surge in oil prices has reversed the fortunes of Origin Energy, which Morningstar estimates will boost its profits by more than 20 per cent in 2019.

Morningstar has increased its fair value estimate for no-moat Origin (ASX: ORG) by 7 per cent to $8, although it maintains its view that the energy retailer is overvalued.

In his latest update, Morningstar equity analyst Adrian Atkins says a 60 per cent surge in the oil price over the past year - nearly tripling from the early 2016 lows - has boosted Origin's Australia Pacific LNG export site.

"In hindsight, we went bearish on Origin Energy too early. But oil price volatility was all on the upside," Atkins says, noting that the APLNG site, of which Origin owns 37.5 per cent, has gone from "barely breakeven a year ago to making copious free cash flows".

Morningstar has increased the oil price it uses in its forecasts for the next few years, and has upgraded Origin's net profit after tax forecasts by 4 per cent in fiscal 2018, 26 per cent in 2019, and 9 per cent in 2020.

"Our longer-term earnings forecasts are not materially changed," Atkins adds, "being based on our unchanged long-term oil price forecast of $60 per barrel, growing with CPI."

gas energy Origin Energy

'Origin’s credit metrics now don't look too bad,' says Morningstar

Buoyant oil prices will boost Origin’s cash flows and help pay down debt, Atkins says, following the large amounts it borrowed to build APLNG, which came online in mid-2016.

"The recent oil price rally has helped hugely, and Origin’s credit metrics now don't look too bad," Atkins says.

Morningstar forecasts proportional net debt/EBITDA of 2.3 times in fiscal 2019, which is comparable with AGL Energy and New Zealand generator-retailers.

Morningstar's FVE for no-moat Origin increases 7 per cent to $8 per share on the assumption of stronger near-term oil prices. Energy is currently trading at $10.17, a 27 per cent premium to the $8 FVE.

This implies a a forward fiscal year enterprise value/EBITDA of 7 times and a P/E of 14 times.

"We assume dividends start in fiscal 2019 at a conservative level so retained earnings can help repair the balance sheet."

 

More from Morningstar

• Regulator cracks down on cash fund names

• Harvey Norman vulnerable amid housing downturn, online competition

• Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Lex Hall is a Morningstar content editor, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.