Centrica Combats Energy Market Disruption – Financial Times | Region & Cash

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

This week, the energy company that owns British Gas was granted a license to reopen the ‘Rough’ reservoir as gas storage to support supplies this winter as fears of a shortage spread across Europe if Russia halts exports.

UK ministers have yet to approve the funding, but Centrica’s investors have taken the development as an indication that gas storage could become a more integral part of the company’s longer-term growth strategy.

Shareholders are increasingly excited to learn more about how Chris O’Shea, Centrica’s Chief Executive since 2020, intends to take advantage of the rapidly changing energy market.

“We’d like to see a clearer long-term strategy on how to come back [sustainable] Earnings growth,” an institutional investor told the Financial Times.

So far, Centrica has survived the energy crisis.

Investec analyst Martin Young is forecasting adjusted operating profit of around £1.3 billion when the company releases first-half results next week as it has benefited from high gas and electricity prices.

The improved performance — and the accumulation of a large cash pile — has some top shareholders increasing pressure on Centrica to reintroduce the dividend it pulled in 2020. A top 10 shareholder told the Financial Times that payout will resume when the group reports first-half results next week are “an absolute must” even as UK households face steep increases in their energy bills.

Former Centrica CEO Iain Conn has slimmed down its oil and gas operations and sold assets such as large gas-fired power stations, but the company still produces gas under UK waters and owns a 20 per cent stake in the UK’s nuclear power stations.

First half results will also benefit from a final contribution from the oil and gas assets sold in Norway in May. An agreement reached in 2013 to buy liquefied natural gas from the US group Cheniere Energy is set to become profitable in the future after it was previously in deficit.

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Even Centrica’s core energy supply business, British Gas, is recovering after years of decline as domestic customers flock to cheaper competitors.

Centrica has rescued around 750,000 customers from failed suppliers over the past 18 months as rising gas and electricity prices proved the company’s longstanding theory that many of its competitors’ business models are unsustainable.

Its share of the UK domestic supply market had recovered to nearly 20 per cent for electricity and 28 per cent for gas by the end of 2021, according to the latest available data from regulator Ofgem. By the time the consumer crisis broke out last year, it had fallen to 18 percent for electricity and 26 percent for gas.

Part of Centrica’s revival was down to luck.

It had tried to sell its entire oil and gas portfolio, including in the UK, as it wanted to focus on energy supplies, but failed to find a suitable buyer. It also scrapped the sale of its 20 per cent UK nuclear stake after the sale process stalled.

But O’Shea has rid the company of layers of unnecessary administration and further reduced costs.

Stock price (p) line chart showing Centrica's performance over the last ten years

Analysts estimate Centrica has around £750m in net cash, which puts it in position to start paying its dividend again next week.

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

JPMorgan Cazenove estimates that Centrica will generate £3.5bn in free cash flow before pension contributions over the next three years. That would be around 70 percent of its current market cap of £5 billion.

“[Centrica] need to do something about the cash flows to come, especially if gas prices stay elevated longer term,” agreed Deepa Venkateswaran, an analyst at Bernstein. However, until now, O’Shea “hasn’t been very clear about what the investment opportunities might be,” she added.

Centrica had planned to hold a capital markets day last year to provide more clarity on how it would participate in the UK bid to net zero greenhouse gas emissions by 2050, but it was canceled as the UK retail energy market finds itself in a crisis was .

O’Shea has spoken to analysts about other potential investments, such as batteries, electric vehicle charging and on-premises power generation equipment, but these need to become clearer soon, Investec’s Young said.

“Which they haven’t really done on a large scale . . . is, ‘Right, that’s the part of the net-zero path that we’re going to focus on, and those are the things that we’re going to do.’”

Outlining its plans to support the UK with strategically important investments like reopening Rough could help diffuse political and consumer reactions if the dividend is reintroduced as expected next week. The dividend resumption would come as UK households grapple with a severe cost-of-living crisis fueled by rising energy bills.

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

“It’s really important that the public understands that Centrica and the British Gas brand name have protected a large part of the retail market,” said the investor. “As of this writing, there is no need for Centrica to be too shy about what she has done.”

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