Centrica emerges from the fight against the upheaval in the energy market

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

The energy company that owns British Gas was granted a license to reopen the ‘Rough’ reservoir as a gas storage facility this week to help supply this winter as fears of a shortage spread to across Europe if Russia halted exports.

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

Shareholders are increasingly eager 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 would like to see a clearer long-term strategy on how to get back to [sustainable] earnings growth,” one institutional investor told the Financial Times.

So far, Centrica has withstood the energy crisis.

Investec analyst Martin Young expects adjusted operating profit of around £1.3bn when the company reports first half results next week as it benefited from high gas prices and electricity.

Improving performance — and amassing a big pile of cash — has led some high-profile shareholders to increase pressure on Centrica to reinstate the dividend, which was withdrawn in 2020. One of the top 10 shareholders told the Financial Times that resuming payment when the group reports its first half results next week was “an absolute must” even as UK households face steep increases in their energy bills.

Former Centrica chief executive Iain Conn cut its oil and gas business and sold assets such as large gas-fired power stations, but the company is still producing gas under British waters and has a 20% stake in British nuclear power stations. .

Its first-half results will also benefit from a final contribution from its oil and gas production assets in Norway, sold in May. A deal struck in 2013 to buy liquefied natural gas from US group Cheniere Energy is expected to become profitable in the future, after being loss-making.

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Even Centrica’s main energy supply business, British Gas, is strengthening after years of decline as domestic customers defect to rivals with cut-price deals.

Centrica has rescued around 750,000 customers in the past 18 months from collapsed suppliers, as soaring gas and power prices proved the company’s longstanding theory that many of its competitors’ business models were not viable.

Its share of the UK domestic supply market had recovered by the end of 2021 to nearly 20% for electricity and 28% for gas, according to the latest available data from regulator Ofgem. It had fallen to 18% for electricity and 26% for gas before the retail market crisis set in last year.

Part of Centrica’s revival is luck.

It had attempted to sell its entire oil and gas portfolio, including in the UK, as it sought to focus on energy supply, but failed to find a suitable buyer. Likewise, it also abandoned the sale of its 20% British nuclear stake after the sale process was blocked.

But O’Shea removed unnecessary layers of management from the business and further reduced costs.

Line chart of stock price (p) showing Centrica's performance over the past decade

Analysts believe Centrica has around £750m of net cash, putting it in a position to restore its dividend next week.

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

JPMorgan Cazenove estimates Centrica will generate £3.5bn of free cash flow over the next three years, before pension contributions. This would equate to around 70% of its current market capitalization of £5bn.

“[Centrica] will have to do something about future cash flows, especially if gas prices remain high in the longer term,” agreed Bernstein analyst Deepa Venkateswaran. However, O’Shea has yet to “be very clear about investment opportunities,” she added.

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

O’Shea spoke to analysts about other possible investments, such as batteries, electric vehicle charging and local power generation assets, but will soon have to be more explicit, Investec’s Young said.

“Which they haven’t really done to a large extent. . . is to say, “That’s exactly the part of the path to net zero that we’re going to focus on and those are the kinds of things that we’re going to do.”

Explaining its plans to help the UK through strategically important investments such as the reopening of Rough could help dispel any political and consumer backlash if the dividend is reinstated next week, as expected. The dividend resumption would come as UK households grapple with a severe cost of living crisis, fueled by soaring energy bills.

One of the top 10 investors also urged O’Shea to clarify the company’s role in rescuing stranded residential customers.

“It’s really important for the public to understand that Centrica and the British Gas brand have protected a large part of the retail market,” the investor said. “There is no need at this point for Centrica to be too coy about what it has done.”

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