AE Portfolio Aggressive Holding Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) reported another weak result for its Energy Markets business for the six months ended Dec. 31, 2013. The Feb. 20 announcement of fiscal 2014 first-half results spurred a short selloff.

A brief rebound into early March was short-circuited as investors priced in the potential impact of slower Chinese economic growth on Australian companies.

Origin’s retail transformation and cost-reduction program should drive better operating performance in the Energy Markets business.

But, as we noted in last month’s Portfolio Update, fiscal 2014, including the first half of the year, will likely be tough for energy retailers. We expect to see reals signs of a turnaround in fiscal 2015 and a return to healthy levels of earnings growth in fiscal 2016.

Origin is Australia’s largest vertically integrated energy retailer. Its diverse operations span the energy supply chain, from oil and gas exploration and production to power generation and energy retailing. Its 37.5 percent stake in the Australia Pacific Liquefied Natural Gas (AP LNG) project, which is expected to make first delivery of cargoes in mid-2015, is expected to drive growth for its Exploration and Production unit.

The bottom line is Origin Energy offers compelling long-term value at these levels.

Energy Markets earnings before interest, taxation, depreciation and amortization (EBITDA) declined 23 percent to AUD505 million, lower than the result for the first half of 2011, AUD538 million, the last period prior to Origin’s acquisition of power assets in New South Wales.

Since then management has invested more than AUD4.75 billion in Energy Markets growth and acquisitions. This combination of weak earnings and substantial asset growth has held return on equity to 6.7 percent, well below the 10.2 percent registered for fiscal 2012.

At the same time, there are sure signs this is the bottom for the unit. The top line will be helped by an easier competitive environment, as regulations limiting the type of “door-knocking” and other aggressive customer-acquisition tactics by other service providers take effect, and a return to more normal weather conditions.

Management has scaled back its hedge book, while lower renewables costs should also generate earnings benefits over the second half of fiscal 2014 and into fiscal 2015.

On the (very) bright side, AP LNG is gathering momentum. The second train is on track for early commissioning, and drilling rates are well ahead of target, which should open up additional opportunities for third-party sales.

In its recent quarterly production update management noted that the upstream component of the AP LNG was approximately 58 percent complete as of Dec. 31, 2013, while the downstream component was 62 percent complete.

Regarding the upstream components of the project, drilling and completions and gathering are ahead of schedule. The main pipeline is nearing completion, and commissioning continues on the Condabri Central gas plant and the water treatment facility.

As for downstream work, all LNG refrigeration compressors for Train 1 have been set. A 2,600-bed accommodation camp is complete. The compressor table tops for Train 2 are complete. The methane and ethylene cold boxes were delivered and set in January 2014. And the last Train 1 module is expected to be set in May 2014.

The project is on time and on budget.

AP LNG will deliver what management describes as “a step change” in Origin’s earnings and cash flow beginning in fiscal 2016, when the project begins to deliver LNG under its existing long-term contracts.

Origin reported production for its Exploration and Production business of 37 petajoules equivalent (PJe) and sales revenue of AUD281 million for the three months ended Dec. 31, 2013.

Production was up 28 percent on a year over year basis, reflecting higher volumes from Otway Basin. Sales revenue was up 39 percent compared to the second quarter of fiscal 2013 on higher production, higher average commodity prices and higher third-party sales volumes.

Production was down 1 percent on a sequential basis, as higher plant availability and increased volumes at Otway were offset by lower seasonal demand at Kupe. Sales revenue decreased 9 percent compare to the three months ended Sept. 30, 2013, on lower production and lower average commodity prices.

Origin reported statutory net profit after tax (NPAT) of AUD322 million for the half year, down from AUD524 million for the prior corresponding period. Fiscal 2013 first-half NPAT was boosted by the gain the sale of a partial interest in AP LNG. Higher LNG-related funding expense and higher impairments also ate at the bottom line.

Underlying profit, however, was up 5 percent to AUD381 million, as the reduced contribution from Energy Markets was more than offset by increased contributions from all other segments. Underlying earnings per share (EPS) were AUD0.346, up 4 percent. The payout ratio for the period based on underlying EPS and an interim dividend of AUD0.25 was 72.2 percent.

Operating cash flow after tax was up 125 percent from AUD461 million to AUD1.04 billion, due mainly to operational improvements resulting in a AUD485 million improvement in working capital.

Underlying EBITDA increased 3 percent to AUD1.08 billion.

Energy Markets’ 23 percent underlying EBITDA decline reflected a reduction in sales volumes due to the impact of warmer winter weather, prior year customer losses, higher solar photovoltaic usage, lower underlying energy consumption due to energy efficiency and the impact of discounts written in fiscal 2013.

Despite continued competitive conditions, Origin posted a net gain in customers of approximately 14,000 during the half year. Natural gas customer accounts increased by 25,000 compared to the prior corresponding period, primarily in New South Wales and Victoria. Electricity customer accounts were down by 11,000, primarily in Queensland. But this rate of attrition was actually an improvement on the prior period.

Operational efficiency efforts, including completion of the migration of retail customers to a new billing system one year ahead of schedule and improvements in billing and collection performance, should boost the top and bottom lines going forward.

Exploration & Production underlying EBITDA increased by 57 percent to AUD302 million on higher production volumes and higher commodity prices.

Contact Energy underlying EBITDA increased by 17 percent to AUD232 million, primarily due to the strengthening of the New Zealand dollar and a lower cost of generation.

Origin also finalized a number of funding initiatives to extend its debt maturity profile and improve its liquidity position. Origin has AUD6.5 billion in existing liquidity, comprising committed undrawn debt facilities and cash. This strong liquidity position is substantially more than that required to satisfy Origin’s remaining funding requirements for its 37.5 percent shareholding in AP LNG.

And Origin doesn’t have any material refinancing requirements until fiscal 2018.

A return to normalcy for Energy Markets will provide a strong, reliable foundation as AP LNG ramps up.

Origin Energy is a buy on the ASX using the symbol ORG and on the US over-the-counter (OTC) market using the symbol OGFGF under USD15.

Origin also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol OGFGY. Origin Energy’s ADR, which represents one ordinary, ASX-listed share, is also a buy under USD15.

Origin Energy closed at AUD14.33 on the ASX on March 14, approximately USD12.96 based on the prevailing Australian dollar-US dollar exchange rate. It last traded at USD13.07 under the symbol OISHF on the US OTC market. The ADR last traded at USD13.10.

Origin Energy’s fiscal year runs from Jul. 1 to Jun. 30. Origin reports full financial and operating results twice a year; it typically posts first-half results during the third week of February, with full fiscal year numbers out in late August.

Interim dividends are usually declared in February along with first-half results. Final dividends are usually declared in August along with full fiscal-year results.

The most recent interim dividend of AUD0.25 per share was declared Feb. 24, 2014; it will be paid on Apr. 4, 2014, to shareholders of record as of Mar. 3, 2014. Shares traded “ex-dividend” on this declaration as of Feb. 25, 2014.

The final dividend of AUD0.25 in respect of fiscal 2013 second-half results was declared Aug. 22, 2013. It was paid Sept. 27, 2013, to shareholders of record on Sept. 2, 2013. It traded “ex-dividend” as of Aug. 27, 2013.

Dividends paid by Origin Energy are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

The Australian government withholds 5 percent to 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the analysts who cover the stock, seven rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology. There are six “hold” and one “sell” ratings on the stock at present. The “best consensus” 12-month target price among the 13 analysts that provide such a number is AUD15.41, with a high of AUD16 and a low of AUD13.50.

Based on a AUD14.33 Mach 14, 2014, closing price on the ASX and a current annualized dividend rate of AUD0.50 per share, upside from here over the next 12 months is approximately 11 percent.