A second major rating agency is set to lower Origin Energy's credit rating to one notch above "junk" status even after the $NZ1.8 billion ($1.6 billion) sale of its majority stake in NZ power supplier Contact Energy, which finance chief Karen Moses said "provides a genuine reduction in financial risk" for the power and gas retailer.
The sale of Contact shares to institutional investors at $NZ4.65 a share was revealed early on Tuesday by The Australian Financial Review. It will enable Origin to pay down debt, which has climbed to about $12 billion thanks to its large liquefied natural gas project under construction in Queensland.
But the removal of a revenue stream for Origin leaves the energy producer more exposed to the frail crude oil price, which slid this week below $US50 a barrel for the first time since January.
That is expected to mean a downgrade in its credit rating by Moody's to Baa3, the lowest investment grade, Origin said on Tuesday.
Standard & Poor's already cut Origin's rating to the lowest investment grade, BBB-, in April, and confirmed that rating was unchanged after the Contact sale.
S&P analyst Thomas Jacquot said the "marginal negative impact" of the loss of Contact, which he described as "Origin's most stable business currently", was broadly compensated for by the reduction in debt. Debt should be about $2.8 billion lower than previously forecast, he said.
Mr King flagged in June to the Financial Review, a possible sale of the company, when he said the 53.09 per cent stake in Contact was no longer important to underpin Origin's credit rating and was "like any other asset in the business". The comment signalled that Origin would consider selling the holding if it felt the funds could be better used elsewhere in its business.
Morgan Stanley energy analyst Stuart Baker described the sale as "a logical piece of business and big enough to help" given smaller asset sales would have cut debt less materially.
Dramatic improvement to balance sheet
"It's pretty obvious to anyone that follows Origin that they need to strengthen the balance sheet and/or take other action to mitigate the consequences of low oil prices," Mr Baker said. "This does dramatically improve the balance sheet."
Origin shares dipped 1.6 per cent to $11.01.
Managing director Grant King said the sale was in line with the plan "to continue to take action to reduce operating and capital costs, realign debt across group entities and, where appropriate, divest assets."
Origin has also been studying the sale of the gas pipeline in the Australia Pacific LNG project but that divestment would be more complex given ownership is shared with partners and production has yet to begin. US partner ConocoPhillips advised last week it expected the first cargo in the December quarter, later than the original mid-2015 target.
The collapse in the oil price, which has halved from a year ago, and doubts around the appetite for the gas from APLNG project's biggest customer, Sinopec, have dimmed sentiment around the start-up.
Bernstein Research said on Monday that Sinopec was likely to delay the start-up of the LNG import terminal at Tianjin that is to take gas from APLNG until 2017 and was looking to resell cargoes because of "exceptionally weak" demand in north China.
Origin's plans to sell Contact crystallised after a deal struck in the weekend for a new electricity supply contract with the Rio Tinto-backed aluminium smelter at Tiwai Point on New Zealand's southern tip.
Macquarie is managing and underwriting the share sale, which is priced at a 7.5 per cent discount to Contact's close on Monday.
CLSA said the sale price reduced 50¢ a share from its valuation of Origin but the discount was smaller than the 9.7 per cent Chevron took for its exit from Caltex Australia in March.
Contact shares are to be dual listed in Australia in four to six weeks.
