Origin Energy (ORG) Update

Origin Energy (ORG) has a price target of $14.70 from Australian stock analyst UBS.

Origin Energy (ORG) Receives $14.70 offer from BG Group plc

When best isn't enough:

ORG's share price had increased from $1.20 to $10.00 in the 8 years since demerging from BLD. However, and with the benefit of hindsight, management's tardiness to jump on the LNG bandwagon and conservative approach to discussing its CSM resource are likely to cost management control and the Australian market one of its best performers.

BG is paying a big price - we estimate A$2.5-A$3.5bn just for exploration:

At the bid price we estimate a 2008 PE of about 28X. We back out an implied CSM value of A$5.6-A$6.5bn and after backing out the NPV of the 2P and 3P gas of about A$3bn we are left with A$2.5-A$3.5bn just for exploration potential. We see that as implying an expectation of finding a further 5000-7000 PJ of gas over and above the 3P resource already announced (1TCF = 1000PJ).

Government the main obstacle:

The price looks high enough to rule out over bidders. FIRB and TPC government hurdles seem the most serious obstacles and although not to be ignored are probably not show stoppers. No doubt a Board recommendation would speed the process and smooth the way. This transaction will likely contribute to higher domestic gas and electricity prices.

Valuation - set at bid price discounted for six months

We assume the bid succeeds hence move our price target to $14.70. If the bid were to fail we believe the share price would now settle at between $11 and $13 given the information about the perceived value of gas resource contained in the bid.