Centrica's full year results are resilient in the context of a very challenging environment, which saw profits in the upstream Exploration and Production (E&P) business fall by 61%. The group has reiterated its target of at least 3-5% growth in operating cash flow per annum at flat real commodity prices, underpinning a progressive dividend policy. The news has reassured investors with the shares up more than 2% in early morning trading.
- Revenue decreased by 5% to £28.0 billion and adjusted operating profit fell by 12% to £1,459 million.
- Adjusted earnings per share fell 4% to 17.2p, reflecting a reduced proportion of profit from the heavily-taxed E&P business.
- Adjusted operating cash flow up 2% to £2,253 million, with increased cash flow from customer-facing businesses offsetting the impact of lower wholesale prices on E&P.
- Capital expenditure reduced to just over £1 billion enabling a 9% reduction in net debt to £4.7 billion.
- £750 million cost efficiency programme on track to be completed by 2020, with £200 million of savings targeted in 2016; and £500 million per annum by the end of 2018.
- Full year dividend reduced by 11% to 12.0p, reflecting re-basing of the interim payment. Centrica continues to target a progressive future dividend.
British Gas: operating profit fell 2% to £809m. Residential energy customer accounts fell by less than 1% over the year, in a competitive market environment.
Direct Energy (North America): operating profit more than doubled to £328m, helped by much colder than normal weather at the start of 2015 and no repeat of additional Polar Vortex related costs incurred in 2014.
Centrica Energy: operating profit fell by 61% to £255m, mainly due to lower commodity prices. The E&P business was free cash flow positive in 2015, reflecting lower costs and capital discipline. A pre-tax impairment charge on E&P and power generation assets of £2,358 million was taken.
Centrica warns the lower commodity price environment will continue to have an impact on the earnings and operating cash flow from E&P and central power generation businesses. However, a focus on cash flow growth and cost savings means the group currently expects to deliver adjusted operating cash flow in excess of £2 billion in 2016.
Centrica says it can reduce E&P capital expenditure further to the bottom end of its £400-£600 million range, if current low wholesale prices persist. As a result, it expects to generate net cash inflows over the period 2016-18.
Centrica's full year results were reassuring in the circumstances. Cost and efficiency savings are progressing well and capital expenditure (capex) is being reduced. This is helping to support cash flows, dividends and net debt reduction. Centrica has stated that even if current commodity prices persist it should still be able to grow its operating cash flows, while capex in the upstream business can be reduced further if necessary. This should help underpin confidence in the dividend.
Centrica's downstream operations have always been highly cash generative. The problem is that historically, most of this cash has been pumped into upstream exploration and production assets. Centrica invested £9bn in its upstream gas and power operations between 2007 and 2014. This left the group very exposed to falling oil and gas prices, and led to a 30% dividend cut.
The turnaround plan is designed to improve returns on capital employed and cash flow; and make the group less susceptible to volatile commodity prices. Investment in the upstream business will be significantly cut back, non-core assets will be sold, costs will be slashed, and Centrica will re-focus on its downstream customer-facing operations.
Centrica has almost 28 million customer relationships in the UK and North America and a strong, well-recognised brand. If the group can leverage these strengths, through cross-selling additional services, while improving efficiency, it should be capable of growing in the long run. In the near term market conditions look set to remain challenging, but a prospective yield of 6.1% suggests the share price is already discounting a lot of bad news.
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