Origin Energy has opted for a full sale of its $1.8 billion-plus conventional oil and gas assets to focus on its energy markets and LNG business in a scaled-back version of the demerger that has long been desired by many investors.
Origin intends to float its upstream oil and gas business and list it on the ASX next year to accelerate reduction of its circa $9 billion debt load and reduce spending requirements, the company said in a surprise announcement on Tuesday.
Shares in the company reacted positively to the news, jumping 5.3 per cent to $6.76 just after the market opened. At 2:07pm AEDT, the shares were 3.4 per cent firmer at $6.64..
But in a move that may concern some investors keen to see lower risk, Origin said its stake in the $25 billion Queensland LNG project and the coal seam gas business that feeds it will remain in the main company.
The sale is a major move by new chief executive Frank Calabria, 48, who only took over from long-standing predecessor Grant King on October 19.
"The day I was appointed I said the focus would be on accelerating debt reduction and improving returns," Mr Calabria said.
'Most value created'
He said Origin's board had considered many options and decided an initial public offering (IPO) of the oil and gas business was best.
"We just think that's where the most value is created," Mr Calabria told The Australian Financial Review. The sale "will be a major step towards restoring the company's financial flexibility."
Origin hasn't put a value on the assets to be sold. But JPMorgan analyst Mark Busuttil estimated they are worth $1.8 billion, while adding that on the multiple that Beach energy trades on the value could reach $3.7 billion.
"We ... note that in the current tight gas market environment they could look more attractive as a standalone entity," Mr Busuttil said.
The spin-off, which does not require Origin shareholder approval, is targeted for 2017. The business will include Origin's gas projects in the Otway, Cooper, Bass and Bonaparte Basins in Australia, as well as the Perth Basin interests, which will now not be sold, Origin said. It will also include the New Zealand interests in the Kupe gas project and in the Canterbury basin.
Macquarie Capital and UBS are advising Origin on the proposed IPO. Origin won't keep a stake in the spun-off company, dubbed NewCo, with the proceeds mainly going on reducing debt.
Chairman Gordon Cairns, who said only in September that a demerger was not under consideration, said the sale would allow Origin to focus on its energy markets business and the "simplified" integrated gas business.
S&P; confirms ratings
"The decision to divest is consistent with Origin's strategy to focus the business, reduce debt and improve returns for shareholders," Mr Cairns said.
"Given Origin's ability to invest capital in NewCo assets is constrained, their long-term value will be better supported by them being an independent business."
The move is expected to add to Origin's earnings per share starting in financial year 2019 and deliver higher returns on capital as soon as it takes place, the company said.
Standard & Poor's confirmed its BBB- rating on Origin and noted the planned IPO "demonstrates Origin's commitment to realign its activities towards its core utility business, moving away from the more volatile and capital intensive exploration and production segment."
Mr Calabria said he expected the new oil and gas company would be an "attractive" investment prospect, with diversified assets across Australia and New Zealand, and a mix of exploration and production assets. Origin will put in place contracts to buy gas from the company, securing its own supplies while also providing near-term revenue certainty for NewCo, which will have an independent board and management.
He wouldn't estimate by how much the sale would reduce Origin's debt, saying it was up to the market to place a value on NewCo. Nor will Origin on Tuesday announce new debt reduction targets, having almost already met its previous target of reducing debt to below $9 billion by the end of June 2017.
Debt reduction
JPMorgan estimated the debt reduction at about $1.5 billion after closing out oil hedges entered into in 2013.
The board and management of NewCo, which will have proven and probable reserves of 948 petajoules and 2015-16 production of 75 petajoules, haven't been named.
Origin is retaining its expensive investment in the Poseidon gas project in the offshore Browse Basin off the far north-west coast as well as the onshore unconventional exploration assets in the Beetaloo Basin in the Northern Territory and its large Ironbark coal seam gas prospect in Queensland.
S&P; said that although the financial gain from the deal would be directly linked to the success of the IPO, it expected the benefits to increase over time given it expected earnings from Origin's conventional upstream business to weaken because of the recent pull-back in investment.