15 September 2016
Shareholder Review & Annual Report 2016
See our FY2016 reporting documents and how we’ve built resilience across our business in a lower oil price environment.
Message from the chairman and the managing director
The past 12 months was a challenging period financially for Origin and its shareholders. While we have celebrated a major achievement in bringing Australia Pacific LNG into operation – a milestone eight years in the making – this has coincided with sustained low oil prices and as a result the company entered the year with an unsustainably high level of debt.
In response, we made significant progress to build resilience across our business. Through our capital initiatives and asset sale program, we have materially reduced debt, preserved cash by reducing operating and capital expenditure, and reduced risk through the purchase of oil put options.
At an operational level, Origin has performed well. The Energy Markets business has significantly increased cash from operating and investing activities and improved operational outcomes across many key indicators of performance. Australia Pacific LNG commenced LNG production from Train 1 and Train 2 is on track to commence production this year.
Origin’s strategy of investing in gas and renewables sees the company well placed to lead the transition to less carbon intensive energy not only domestically through the Energy Markets business but also in regional markets through investment in Australia Pacific LNG and its growing LNG production.
The year in review
Underlying EBITDA from continuing operations of $1.6 billion was slightly below the prior year reflecting a strong operational performance from Energy Markets and the commencement of LNG production from Australia Pacific LNG.
Underlying profit from continuing operations of $354 million was down 41 per cent on the previous year. The increased contribution from LNG at current low oil prices did not fully offset the increase in interest and depreciation which was the main driver of the decline in underlying profit from continuing operations of $249 million to $354 million.
The statutory loss from total operations was $589 million, an improvement of 10 per cent on the prior year. The main drivers of this result include a lower underlying profit from continuing operations ($249 million), the sale of Origin’s entire interest in Contact Energy ($55 million) and a reduction ($386 million) in items excluded from underlying profit.
Items excluded from underlying profit include non-cash after-tax impairments of $515 million. This includes an impairment charge of $271 million taken in the second half, driven primarily by downward revisions to reserves disclosed in the company’s Annual Reserves Report in July 2016.
Net cash from operating and investing activities improved $3.3 billion to $1.2 billion driven by asset sales and improving cash flow as capital expenditure and operating costs were reduced. As a consequence of improved cash flows, asset sales and the Entitlement Offer in October 2015, Origin’s adjusted net debt decreased by $4 billion.
Statutory and underlying Earnings Per Share have reduced to (37.3) cents per share and 23.2 cents per share respectively reflecting the increase in the number of shares on issue and lower underlying profit.
Strong operational performance
Energy Markets delivered a strong operational performance with an increased EBITDA contribution of $70 million to $1.3 billion. Gross profit contributions from the Natural Gas and Electricity businesses were preserved in a market that has changed significantly in the past year while costs were reduced. Importantly, net cash from operating and investing activities increased by $522 million to $1.3 billion.
A major milestone was the commencement of exports by Australia Pacific LNG in January 2016. Train 1 production has ramped up quickly to above nameplate capacity and to date, the project has shipped 36 cargoes(1), primarily to its two major customers, Sinopec and Kansai.
The maiden contribution from the commencement of LNG production by Australia Pacific LNG has in part offset the impact of lower oil prices on the Integrated Gas business which decreased by $112 million to $386 million. As the investment in Australia Pacific LNG nears completion and cash flows from production begin, cash flow from operating and investing activities improved by $1.4 billion to ($1.6) billion.
Delivering on our commitments
During the past 12 months, we have taken decisive action to stabilise the business in the face of low oil prices, not least repaying $4 billion of debt to reduce our adjusted net debt to $9.1 billion.
Asset sales totalling $484 million were announced during the period, in addition to the sale of Origin’s interest in Contact Energy for proceeds of $1.6 billion. The sale of additional assets remains on track to meet the $800 million target by the end of FY2017.
In the 18 months to the end of FY2016, we reduced our workforce by 28 per cent, or 2,500 people, as capital projects were completed or stopped, some activities such as overseas exploration and development discontinued and operational efficiency improved. This will support a continued reduction in cash costs into FY2017.
Our Energy Markets business achieved a $100 million operating cost reduction target from financial year 2014 levels, and also reduced capital expenditure by $50 million in FY2016, driving an improvement in Underlying Return on Capital Employed (ROCE) from 9.6 per cent to 10.1 per cent.
As the upstream operator of Australia Pacific LNG, Integrated Gas delivered more than $1 billion per annum in recurring upstream cost reductions. We have also taken action to reduce exposure to low oil prices through the purchase of put options over 15 million barrels of oil for FY2017 at prices of US$40 per barrel and A$55 per barrel.
Given the important task of continued debt reduction and the fact that in the current lower oil price environment Origin is not generating franking credits sufficient to frank any dividends, the Board has determined to not pay a dividend in respect of earnings for the second half of the financial year.
While the Board will review each dividend decision in light of the prevailing circumstances, the Board’s view is that suspension of the dividend is in the best overall interest of shareholders.
Board and executive changes
During the period, there were changes to the Origin Board. In September 2015, Scott Perkins joined the Board as an Independent Non-executive Director and member of the Audit and Remuneration committees.
At the 2015 Annual General Meeting last October, Karen Moses advised of her intention to retire in 2016 to pursue opportunities as a Non-executive director. Karen stepped down from the Board at that time and from her role as Executive Director, Finance and Strategy in May 2016. Karen has made an invaluable contribution to the growth and development of Origin for more than 20 years and we wish her well for the future.
Origin’s Group Financial Controller, Gary Mallett, is currently acting in the role of Chief Financial Officer.
In FY2017, Origin expects a 45 to 60 per cent increase in Underlying EBITDA when compared to FY2016 Underlying EBITDA from our continuing operations(2).
Origin’s remaining contribution to Australia Pacific LNG is expected to be approximately $600 million(3), in line with previous guidance. Elsewhere in the business, Origin’s capital expenditure will continue to reduce.
In FY2018 and beyond, as Australia Pacific LNG completes the transition from development to production of its LNG project, we expect to see significant growth in earnings and returns, strong cash flow and continuing reduction in debt. We are on track to be well below our target of $9 billion adjusted net debt by the end of FY2017.
In concluding, we would like to thank our people for their extraordinary efforts. While this year has presented enormous challenges, we can look to the future with increasing optimism and confidence.
Finally, we would like to recognise and thank our other key stakeholders – our customers, the communities in which we operate, our business partners and particularly you, our shareholders for your ongoing support.
- As Announced at Origin's full year results.
- This guidance is based on an average oil price of US $52.90/bbl and a AUD/USD exchange rate of $0.74 and is dependent on timing of production from Train 2. For Australia Pacific LNG, the effective oil price for oil-linked LNG sales will incorporate the lag in oil prices prices associated with LNG Sale and Purchase Agreements.
- As announced in February 2013, based on December 2012 exchange rates.
2020 Investor Day
Investor day presentation by Origin CEO Frank Calabria, CFO Lawrie Tremaine, Executive General Manager Integrated Gas Mark Schubert, Executive General Manager Energy Supply & Operations Greg Jarvis, Executive General Manager Retail Jon Briskin and Executive General Manager Future Energy & Technology Anthony Lucas.