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 (TSX:RY) 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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