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Why is the Origin Energy (ORG) share price sinking today?

Posted: 1 June 2022 1:07 pm
News
ORG-shares-06June_1800x1000_Finder

Shares in electricity giant AGL Energy have been climbing, so what went wrong today?

Shares in electricity giant Origin Energy (ASX: ORG) are high on the list of top traded shares on Wednesday after the stock sank more than 15% in early trade to $5.85 each, bucking recent momentum that had seen it climb 43% in the last 6 months.

By comparison, shares in rival AGL Energy (ASX: AGL) were down just 0.6% in a flat overall market.

What is weighing on the ORG stock price?

Sentiment in Origin Energy shares turned bearish after Australia's second biggest power producer on Wednesday slashed the current earnings forecast for its main energy markets unit by a quarter and withdrew the earnings guidance for the 2023 financial year.

The company attributed this to extreme volatility in electricity markets and coal supply problems at its Eraring plant in NSW, Australia's largest coal-fired power station, which is due to be shut by mid-2025.

As a result, underlying earnings at the energy markets division are expected to fall to between $310 million and $460 million, a 26% drop at the mid-range from the original guidance of $450 million to $600 million.

The problems are seen extending into the 2023 financial year, which along with ongoing volatility in commodity prices, prompted the company to scrap its guidance for next year. It had previously forecast underlying EBITDA of $600 million to $850 million for energy markets in FY2023.

Surging prices

Origin's announcement comes amid a surge in energy prices around the globe, largely following Russia's invasion of Ukraine in February and the subsequent economic sanctions against the major energy producer, which has seen oil and gas prices spike.

A series of outages at ageing coal-fired power plants in Victoria, New South Wales and Queensland have also contributed to pressures, resulting in a 140% surge in domestic wholesale electricity prices in the March quarter. Electricity and gas markets have continued to climb in April and May, meaning businesses and households are in line for a hit of hundreds of dollars in their power bills.

The problems at Origin's energy markets business have in part been caused by issues with its supplier, Centennial Coal, which is struggling to deal with production constraints at its Mandalong mine. That means Origin is exposed to paying higher wholesale prices to buy alternative supplies to meet customer demand.

"The recent material under-delivery of coal to Eraring results in lower output from the plant, additional replacement coal purchases at significantly higher prices, and is being exacerbated by coal delivery constraints via rail," the company said in a statement to the ASX.

It expects to pay more for coal because of soaring thermal coal prices and said there are limitations for securing additional supplies. Given the high degree of uncertainty, it has withdrawn all guidance for FY2023.

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