Origin attacks APLNG costs

ORIGIN Energy is aiming for “step change” cost reductions at Australia Pacific LNG, planning to cut them by more than $500 million a year over the next 18 months and halving Surat Basin well costs.
Origin attacks APLNG costs Origin attacks APLNG costs Origin attacks APLNG costs Origin attacks APLNG costs Origin attacks APLNG costs

Surat Basin csg.

All this would reduce APLNG's distribution breakeven target to a run rate of less than US$40/boe by 2019, though Origin expects the project to be cash flow break-even at $48/boe by FY2018. 
 
Origin announced the plans ahead of today's management presentation which could see APLNG's enterprise value surge, even as the company prepares for front end engineering and design on the Ironbark CSG project in Queensland.
 
RBC Capital Markets' "very quick take" from comparing Origin's presentation with its own model is that reducing breakeven to those levels would add in the region of A$60-70cps to the bank's APLNG EV estimate and boost its counted cash flow valuation for Origin itself to about $9.30-9.40/share from A$8.67/share.
 
At APLNG, Origin is also targeting lower costs from Surat Basin wells, with per well costs to be halved from $2.4 million in FY18 to $1.2 million by June 2019 with simplified well delivery. 
 
This is in line with the well costs that Gladstone LNG operator Santos is currently seeing at its megaproject in the Roma field, as analysts saw at the recent Santos field trip. 
 
Origin wants to reduce operating costs at APLNG from $1.30/GJ in FY18 to a run rate of A$1/GJ from June 2019, and highlighted that it is also reassessing the field development plan for Ironbark which flags a potential impairment, with the carrying value to be tested at the half-year results.
 
Origin is also running its Eraring coal plant harder in response to high wholesale prices, expecting output to rise to 15.5-16TWh from prior guidance of 14.6-15.3TWh.
 
Yet the company also wants to grow renewables to partner with its existing gas fleet as it looks to grow market share in the domestic gas scene.
 
Origin is on track for adjusted net debt of $7 billion by June 2018 once the $1.585 billion sale of Lattice Energy to Beach Energy wraps up, with $4.3 billion of liquidity at October 31.
 
The company has further opportunities to reduce debt and has cancelled $2 billion in surplus undrawn debt facilities, which saves about $14 million a year in interest alone.
 
It will, however, spend between $80-100 million on upstream commitments and digital metering, a further $170-190 million on power generation, solar and LPG initiatives.
 
Amid all this, Origin is targeting $110-130 million in productivity and growth via upstream exploration and appraisal, a quarantine refit, digital systems and "future energy", as it noted the International Energy Agency's expectation that renewables will be the fastest-growing source of energy.
 
Gas, however, will continue to play an important role under all IEA carbon reduction scenarios, justifying keeping APLNG in its core portfolio and not hiving it off with Lattice.
 
The company also has a potential shale gas monster waiting in the wings of the Beetaloo Sub-basin if the Northern Territory lifts its hydraulic fracturing moratorium.
 
Origin was trading at $8.80 this morning.

 

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