Centrica comes out fighting from energy market shake-up

18 miles off the Yorkshire coast, a large sandstone reservoir offers one clue to a puzzle that Centrica investors hope the company will soon help them solve.

This week the energy company that owns British Gas received a license to reopen “Rough reservoir as a gas storage facility to help with supplies this coming winter as fears spread of shortages across Europe if Russia halts exports.

UK ministers have yet to sign off on funding, but Centrica investors took the development as a sign that gas storage could become a more integral part of the company’s long-term growth strategy.

Shareholders are increasingly impatient to find out how Chris O’Shea, Centrica’s chief executive since 2020, intends to take advantage of the rapidly changing energy market.

“We want to see a clearer long-term strategy on how to get back to it [sustainable] earnings growth,” one institutional investor told the Financial Times.

So far Centrica has survived the energy crisis.

Investec analyst Martin Young expects an adjusted operating profit of around £1.3bn when the company publishes first-half results next week, as it has benefited from higher gas and electricity prices.

The improved performance – and the accumulation of a large cash pile – has led some of the top shareholders to increase pressure on Centrica to restore the dividend, which is continued in 2020. One of the top 10 shareholders told the Financial Times that renewal of payment When the group reports its first-half results next week they were an “absolute must”, despite British households facing sharp rises in their energy bills.

Centrica’s previous CEO, Ian Kuhn, played it down Oil and gas activity and sold assets such as Large gas-fired power plantsBut the company still produces gas under the UK’s water and owns a 20% stake in the UK’s nuclear power plants.

Its first half results will also benefit from a final contribution from its oil and gas production assets in Norway, sold in May. An agreement signed in 2013 to purchase liquefied natural gas from the American Cheniere Energy group should become profitable in the future, after previously being a loss.

Even Centrica’s core energy supply business, British Gas, is recovering after years of decline as local customers defected to rivals offering cut-price deals.

Centrica has rescued around 750,000 customers in the past 18 months from collapsed suppliers as rising gas and electricity prices proved the A long-standing theory that many of its competitors’ business models were not sustainable.

Its share of the UK domestic supply market has recovered by the end of 2021 to almost 20% for electricity and 28% for gas, according to the latest available figures from regulator Ofgem. It was down 18 percent for electricity and 26 percent for gas before the retail market crisis hit last year.

Part of Centrica’s revival was down to luck.

It tried to sell its entire oil and gas portfolio, including in the UK, as it sought to focus on energy supply but was unable to find a suitable buyer. It also similarly canceled the disposal of its 20% British nuclear stake after the sale process stalled.

But O’Shea stripped the company of layers of unnecessary management and further reduced costs.

A line chart of the share price (p) showing Centrica's performance over the past decade

Analysts estimate that Centrica has around £750m of net cash, putting it at was going to pay back its dividend Next Week.

Investors also want to know how O’Shea will use future cash flows, as it is expected to benefit from continued high commodity prices.

JPMorgan Cazenove estimates Centrica will generate £3.5 billion in free cash flow over the next three years, before pension provisions. That would be equivalent to around 70% of its current market value of £5 billion.

“[Centrica] Something will have to be done about the cash flows coming in, especially if gas prices stay high longer term,” agreed Deepa Venkateswaran, an analyst at Bernstein. However, O’Shea has so far not been “very clear on the investment opportunities,” she added.

Centrica had planned to hold a capital markets day last year to further clarify how it would participate in Britain’s bid to reduce greenhouse gas emissions to net zero by 2050, but it was canceled as Britain’s retail energy market was in the midst of a crisis. .

O’Shea has talked to analysts about other possible investments, such as batteries, electric vehicle charging and domestic energy generation assets, but will soon need to be more specific, Investec’s Young said.

“What they haven’t really done to a large extent . . . is say: ‘This is exactly the part of the net zero trajectory that we’re going to focus on and these are the kinds of things that we’re going to do.'”

Detailing its plans to help the UK through strategically important investments such as the reopening of Rough could help head off any political and consumer backlash if the dividend is restored next week, as expected. The resumption of the dividend will come as British households face a severe cost-of-living crisis, fueled by soaring energy bills.

A Top 10 investor also urged O’Shea to clarify the company’s role in rescuing stranded domestic customers.

“It’s really important for the public to understand that Centrica and the British Gas brand name have protected a large share of the retail market,” the investor said. “It’s not necessary at this point for Centrica to be too coy about what it’s done.”

Centrica comes out fighting from energy market shake-up Source link Centrica comes out fighting from energy market shake-up

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