What is Happening to the Origin Energy Share Price?

What does Origin Energy do?

Origin Energy [ASX:ORG] is a vertically integrated energy company. It’s involved in the exploration and production of oil and gas, the production of electricity, and the wholesale and retail sale of electricity. For many years, investors viewed ORG as a stable, high-quality business.

But that changed with its foray into liquid natural gas (LNG), which resulted in a multi-billion dollar investment in a new LNG plant in Gladstone, Queensland. That investment, along with a collapse in the oil price which started in 2014, led to a massive fall in ORG’s earnings. This sent the share price plummeting.

What’s happening to the ORG share price?

The chart below shows the Origin Energy share price over the past two years. From a peak of just over $16 in 2014, the stock price fell to around $3.50 earlier this year.

This massive destruction of shareholder value has much to do with Origin’s investment in a new LNG plant. The board based the investment on the assumption that oil prices would remain high. They didn’t.

The fall below US$60 a barrel means most of these LNG plants can’t turn a profit, thanks to the massive upfront capital cost.

Another way of putting it is to say that Origin’s return on capital is less than its cost of capital. Whenever that happens, shareholder wealth is destroyed. Hence the massive fall in the share price.

origin energy stock price 31Mar16

Source: BigCharts

What now for Origin Energy?

Is there any hope for Origin shareholders?

Yes there is. While the fundamentals don’t look particularly good for the company, oil prices may be close to a bottom. If this is the case, profitability will improve in the future.

If you look at the chart above, you can see that the Origin Energy share price has rebounded nicely from the lows. It’s now moving sideways. The share price will either break higher or lower from here. A break above the recent high, around $5.50, will be a positive sign and indicate the worst is over.

On the other hand, a break below the recent lows, around $4.75, will tell you that Origin is heading back towards $3.50.

When markets or stock prices are moving sideways, the best course of action is to do nothing. Wait for the market to tell you what to do. Don’t anticipate or guess. That’s just gambling.

Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.

If you’d like to know more, click here.

Greg Canavan
Editor, Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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