Investors responded positively to Origin Energy's decision to spin off its portfolio of conventional oil and gas assets, pushing the company's share price up by 2.49 per cent on Tuesday to $6.58.
The move is designed to repair the company's balance sheet and restore it to profit growth.
Analysts' early estimates are that the move, which will create a new mid-sized oil and gas company in Australia, will enable Origin to reduce debt by $1.5 billion or more.
Despite recent statements from Origin's chairman Gordon Cairns that it would not demerge these assets under the stewardship of the newly appointed chief executive Frank Calabria, the company is spinning off these assets into a new company to be listed on the Australian Stock Exchange.
Mr Calabria who has been in the job only a few months said on Tuesday that the move was consistent with the clear priorities he set when he was appointed.
The company has been under pressure from shareholders to reduce its substantial debt pile and had undertaken to investors to get down to $9 billion in 2017 from the June 2016 net debt of $9.1 billion.
While analysts raised questions about whether the spin-off was the most effective way to sell assets, they were broadly supportive of the strategic direction.
Inflated debt
Origin's debt became inflated by funding its investment of the $25 billion Australia Pacific LNG project in Queensland. In 2015 Origin raised $2.5 billion in equity from investors but has been hit by falling oil and gas prices.
Despite numerous asset sales Origin, which reported a statutory loss in 2016 of $589 million after a number of write-downs to the value of oil and gas reserves, remained under pressure to continue to repair its balance sheet.
Its underlying profit fell 41 per cent and it scotched the full-year dividend and cut 2500 jobs..
The deal announced on Tuesday will see Origin streamline its business to focus on energy retailing of gas and electricity and a simplified integrated gas business.
Ridding itself of the upstream conventional oil and gas assets will cut the demands for capital expenditure as many of these assets were in exploration and development stage and only a portion were producing.
The spin-off company will include Origin's interests in the Otway Gas Project, BassGas Project, Kupe Gas Project, and the Perth, Cooper, Bonaparte and Canterbury basins. Origin will retain its interests in Australia Pacific LNG, Ironbark and the Browse and Beetaloo basins.
The move is expected to add to Origin's earnings per share starting in 2018-19 and deliver higher returns on capital as soon as it takes place, the company said.
Origin will hold no equity in the new spin-off company but will have supply contracts put in place for NewCo to provide Origin with access to existing resources and rights over undeveloped resources in support of its east coast gas portfolio.
The new company will become the fourth-largest Australian oil and gas company after Woodside, Santos, and Oil Search.
An investor report on Tuesday from JPMorgan noted the "value of upstream assets is being constrained by Origin's balance sheet: We believe additional value creation in NewCo could come from exploration and development."
Mr Calabria who has given little detail on Newco's balance sheet said it would "have capacity to make acquisitions ... and a capital structure to pursue growth ... it does have development opportunities".
The new company's market value will be determined in large part by the trajectory of the oil price which has been up almost 20 per cent over the past week since OPEC announced a cut in production.
While this augurs well for the demand for stock in the yet-to-be-created Origin spin-off, the health of the equity markets in 2017 will also be a large factor.
When asked about the the timing of the decision to divest via an IPO Mr Calabria said the decision was made by him and the board. "We have done quite a bit of work around this", saying that it was not made in response to improved commodity prices.