Origin Energy (ORG) is upgraded to Buy / Medium Risk and it has a $23.70 share price target from Australian stock analyst Macquarie Research Equities.

Origin Energy Ltd (ORG): Still the King

Upgrade to Buy, target price $23.70 — ORG’s reserves upgrade today highlights the extent of the company’s leverage in what is clearly now a strategic resource base. We upgrade ORG to Buy / Medium Risk, with a 12- month target price of $23.70.

Resource potential overlooked — ORG today announced a material increase in its 3P reserves to 10,122PJ. Netherland, Sewell & Associates (NSAI), an independent petroleum consultant, has estimated ORG’s Contingent Resource (2C) at an additional c.13,500PJ. ORG’s 2C reflects the potential of its resource base to grow, with a deeper understanding of the resource’s production capacity and the trajectory of gas prices in the east coast of Australia likely to prove this estimate conservative.

$1 today or $1 tomorrow — We recognise the time value associated with ORG monetising their reserves, and realising the optionality within the business. The multiples we have assumed in our (risked) option value take this opportunity cost into account.

ORG rejects sweetened bid — In announcing its decision regarding BG’s takeover proposal for the entirety of the company, ORG revealed that the former had upped its offer to $15.50 cash per share, from $14.70. Despite the certainty that a cash bid represents, the analysis we undertook around this deal fully supports the Board’s decision (refer ‘Monetising Acreage’ 21/05/08).

Forecast changes — Our earnings forecasts remain unchanged. Our fair value for ORG’s underlying business remains unchanged at $11.00 per share. Our $23