Martin Conlon: The great Origin Energy debate and what it means for Australia's future

"That probably goes to the heart of the Origin Energy (ASX: ORG) debate," he says. 

"I think that the problem with the current level of electricity prices globally is that there's not a big enough profit pool to pay for the trillions of investment [needed to transition]." 

In addition, most renewable energy investments globally struggle to make money, he says. 

"You also look around the world and say for the most part, countries with high levels of renewable penetration do not have lower electricity prices. So the popular wisdom that renewables make energy cheaper is just not evidenced," he adds. 

Origin Energy shareholders reject Brookfield, EIG takeover offer

It comes as a takeover bid led by Brookfield and EIG Partners narrowly missed the number of votes it needed to take Australia’s largest energy provider private. 

While 69% of Origin shareholders voted in support of the offer, the consortium needed 75% for the bid to succeed. 

The consortium was offering around $12.8 billion for Origin Energy. And while Origin and AGL (ASX: AGL) together deliver half of Australia's power, they "haven't made more than a couple billion dollars" in EBIT between them.

"Let's say we need to spend $300 billion on the grid and renewable energy. You want to get a low 5-10% return on that number. You need somewhere around $15-$30 billion of EBIT. That's quantum's more than the sector currently earns," Conlon explains. 

"You're not going to get that envelope of profit without it, which is why the idea that the government can expect a huge amount of money to come in to build renewable energy in the envelope of current electricity prices, to us, is just unrealistic. 

"There's a cost of renewable energy and the profit needs to come from somewhere." 

"Most renewable energy... is intermittent and therefore requires backup [power]. The backup costs need to be added to the cost of renewable power to get the real cost of renewables," he explains. 

"In order to provide a profit pool for renewable energy investment, electricity prices need to go higher than they are now and that's not what governments want." 

I think I can speak for all our readers here that it's not what consumers want either. And yet, we often forget that "energy is the lifeblood of every single company in the economy", as Conlon puts it. 

"No tech company exists without energy and to us, you can never underestimate how important it is, yet it's a pretty small part of the stock market," he says. 

According to Conlon, this is because the "financial economy has grown much faster than the real economy" over the last decade. 

"A lot of people are investing on the basis that these multiples are right. You look at the valuations you read every day, it's almost a random number," he says. 

Take CSL (ASX: CSL) at 30 times earnings, or Cochlear (ASX: COH) at 50 times earnings, for example. "Where did they get these numbers from?" Conlon asks. 

"If you invert those multiples, they are incredibly low discount rates and that to us, is probably going to be the key in equity markets," he says. 

"People are underestimating the amount of risk they're taking paying very high multiples because that's all it is. It's a risk of the future not being what you expect it to be." 

"The risks invariably are the ones no one's talking about. If everyone's expecting that we'll never lose money unless unemployment goes up, something else will blow up," he says. 

"When people get complacent about something continuing because it's prevailed for a long time, that is almost the definition of risk." 

Where Conlon sees opportunity over the next 12 months 

Iron ore prices are unlikely to stay this elevated, he adds - and thus, he recommends investors avoid darlings like Fortescue (ASX: FMG) and BHP (ASX: BHP). 

On the other hand, alumina and aluminium have fallen out of the market's favour - and are thus opportune areas for value-hungry investors - with Conlon pointing to Rio Tinto (ASX: RIO), South32 (ASX: S32) and Alumina (ASX: AWC) as examples.