Centrica has enjoyed a spell in the sun. The surge in wholesale energy prices after Russia invaded Ukraine wounded a lot of businesses — in many cases, fatally — but was very helpful for this giant energy business with more than ten million customers.
Centrica’s upstream arm benefited from the high prices, its British Gas retail business profited from high customer bills, and its gas-storage business surged, too. Operating profits were not far away from £3 billion in both 2022 and 2023. Executives have, notoriously, been well remunerated — chief executive Chris O’Shea famously said that even he found it “impossible to justify” his £4.5 million pay package — and shareholders have not been forgotten either: lucrative share buybacks for investors have totted up to £1 billion overall since 2022, and the dividend was increased by a third to 4p a share at the full-year results in February.
However, these glory days for shareholders in the FTSE 100-listed Centrica appear to be numbered. Commodity prices have steadied despite the geopolitical upheaval in the Middle East since Hamas’s attack on Israel last October, with O’Shea warning recently that Centrica’s income looks set to fall this year, saying: “Sharply lower commodity prices and reduced volatility will naturally lower earnings in comparison with 2023 as we return to a more normalised environment.”
Despite the breadth of Centrica’s activities across the energy market — its assets span upstream exploration and production, downstream supply, services (with brands including drains business Dyno-Rod, smart heating brand Hive, and social housing specialist PH Jones), plus energy market trading — there is no single dazzling area of appeal.
The share price has risen steadily over the past five years, now standing at 131p, up 18 per cent on this time last year, and now looks like a good time to head for the exit. That buybacks are such a central part of Centrica’s allocation of capital suggests a focus on propping up short-term shareholder demand rather than on long-term business investment.
The energy giant’s shares, said analyst Sam Wahab at Liberum Capital, “reflect an overly optimistic assessment of Centrica’s long-term cash return and investment plans, as market normalisation continues to impact a declining [earnings per share] profile.”
Of course, the oil price may still surge if full-blown war erupts with Iran; about a fifth of the world’s seaborne oil flows through its Strait of Hormuz. Yet analysts believe the supply would not be drastically disturbed. On the retail side, meanwhile, British Gas has failed to keep up with fast-growing industry tiddlers, which have focused on better customer service and prices. Scandals including British Gas forcing entry into vulnerable people’s homes to fit pay-as-you-go meters also hurt its image; customer numbers fell about 8 per cent last year.
While Centrica’s balance sheet is glowing — it had £3 billion net debt in 2021, but now has £2.7 billion net cash — its prospects look dull. Pocket the gains and sell Centrica.
