Origin Energy will cut more than half a billion dollars in annual costs over the next 18 months at its Pacific LNG (APLNG) joint venture.
Speaking at an investor day on Tuesday, Origin executives outlined the company’s goal of slashing both operating and capital expenditure at APLNG as it focuses heavily on the project following the divestment of subsidiary Lattice Energy in September.
Origin’s executive general manager for gas, Mark Schubert, said the group was targeting reduced operating costs of $1.30 per gigajoule in fiscal 2018 to $1 a gigajoule from June 2019 by applying lessons from the US shale boom to APLNG.
“We’re influenced by best practice we saw in US shale, we go to the US because we want to see that parallel universe best practice,” Mr Schubert said.
“We’ll unashamedly copy that and bring it back here.”
He said the focus was on removing goldplating from its engineering at the project.
Origin is also aiming to reach an operating breakeven of less $US24 a barrel of oil equivalent, below its current guidance of $US30/boe.
RBC Capital Markets analyst Ben Wilson said the targeted reduction at APLNG would have a major impact on its valuation.
“Our very quick take from looking at our model is that reducing breakeven to these levels would add in the region of 60 to 70 cents a share to our APLNG enterprise value and increase our Origin DCF valuation to ~$9.30-9.40/share, up from from $8.67 per share,” Mr Wilson said.
“Management are targeting significant APLNG cost savings and productivity to keep momentum going in this story and we look ahead to a potential return to dividend distributions from CY19.”
APLNG is a joint venture between Origin Energy, US giant ConocoPhillips and China Petroleum & Chemical Corp (Sinopec).
Last month, Origin announced it would increase APLNG’s levels of domestic gas supply, bringing the company’s total commitment to 186 PJ for 2018, representing almost 30 per cent of n east coast domestic gas market demand.
Origin said APLNG was “exceeding performance expectations” as it reiterated the project’s full-year 2018 guidance, as well as full-year earnings guidance for the group.
The Sydney-based company took on additional debt to build APLNG, which it said would be trimmed to below $US7 billion by the end of fiscal 2018.
The group also said it was examining further renewables investment.
Origin executive general manager Greg Jarvis said it was “looking heavily into pumped hydro” at Shoalhaven in NSW.
“We’re doing feasibility studies now,” Mr Jarvis said.
Its shares jumped 3.7 per cent to trade at $8.905 at midday.