Are Origin Energy shares a Buy Opportunity Amid the Takeover Saga?

Ujjwal Maheshwari Ujjwal Maheshwari, November 27, 2023

In the energy sector, few shares are as compelling as that of Origin Energy shares (ASX: ORG), which is why it has been the subject of takeover interest.

It has accepted a US$12bn takeover offer from Canada’s Brookfield and the US-based MidOcean, and the ACCC has approved too. But will the deal go ahead? It was set for a vote last week, but will now be voted on this week, and investors fear the deal might be off. How come? Because the deal needs 75% of investors to approve, a high threshold to begin with. But also because AustralianSuper, an opponent of the deal, is accumulating a stake in the company (currently 17%).


What if the deal doesn’t happen

So, what if the deal is off? Inevitably, shares will drop on the day when the deal is off due to investor disappointment. It does beg the question of where shares will go in the long-term. Will the fearful investors eventually be proven wrong by those who snap up shares at a cheaper price. Or will it be ‘buyer beware’ for investors who ‘buy the dip’?


A turbulant 2023, takeover deal aside

As a company operating in the field of energy within Australia, it is always subject to turbulence. And it has been no different in 2023. You’d expect the company to be gaining from higher energy prices, but not so much.

The stock of Origin Energy has dropped by 9% since the end of October. However, upon deeper scrutiny, one would notice that the company’s fundamentals are in generally good shape. Investors would be concerned about its falling profits in recent years despite higher energy prices. Nonetheless, we observe that the ROE (Return on Equity) for Origin Energy is currently at 12% and this is above the average for the sector of 8.1%. The difference between ROE and earnings growth is a puzzle that is not easy for investors since there are probably hidden problems relating to capital allocation or efficiency in operations.



The Long-Term Prospects of Origin Energy shares if the deal is off

While the company’s position is still strong in the energy sector, one should look beyond the immediate challenges. With its interests spanning conventional and alternative energies, this makes the company perfectly positioned to profit from the changing character of this sector. This increased diversification, however, also poses various market risks like regulatory adjustments, shifting technology, and considerations in the environment.

We like the company’s Return on Equity (ROE) of 12% (higher than the industry average), which shows a good return on shareholders’ equity. Although the stock prices have fluctuated during the last year or so, registering a modest projected 9.9% growth over the coming year might be seen just as a short-lived phenomena against the background of an impeccable position on the global oil markets coupled with a diversified energy portfolio.

Though challenging, it shows that there is a great interest in the market that can unlock shareholder value, because our analysis points out that Origin Energy’s current market position as well as its venture into renewable energy offers excellent long-term development prospects, making it an interesting purchase.


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