Centrica plc (CNA) Ord 6,14/81p
HL comment (13 May 2019)
Centrica says trading in the four months to the end of April has been impacted by several external factors.
While CEO Iain Conn says the group will present a strategic review at the half year stage, there was no change to full year guidance with this update.
The shares rose 3.3% on the news.
Centrica has scheduled a strategic review for 30 July. It will include 'reflections on the current business portfolio, updated future expectations for the customer-facing divisions and an update to the Group's financial framework' and could have implications for the dividend.
But how did we get here?
Since being caught out by the oil price crash of 2014/15, Centrica's been shifting focus away from the potentially volatile world of upstream oil production to the utility businesses in the US and the UK, namely Direct Energy and British Gas.
The business hasn't always been a stand out, but we can understand why the decision was made. Retail energy supply doesn't require much fixed investment, so is highly cash generative. The group has millions of retail customers and recognisable brands, with opportunities for efficiency savings and cross-selling (such as the Hive smart products).
However, things don't look so rosy now. Higher wholesale prices and the government's price cap mean profits in the Consumer division are being squeezed. Meanwhile the rise of price comparison sites and smaller challengers mean customer outflows continue. It's a similar story in Centrica's business-to-business divisions.
There are a couple of silver linings. Higher oil and gas prices are boosting returns from the remaining upstream assets, while the huge cost cutting program is progressing nicely. As a result, debt reduction is on track.
However, positives have been outweighed by a succession of profit warnings. Centrica has previously said it would commit to the 12p annual dividend as long as it could generate over £2.1bn of adjusted operating cash flow, so the fact its current target is for £100-£300m below that is potentially bad news too.
Lower capital expenditure, the sale of its stake in nuclear power assets and cost savings will help keep the wolf from the door, but such measures can't continue forever. Centrica has to stabilise its energy supply business.
Unfortunately, we think a dividend cut is a distinct possibility.
A tumbling share price means Centrica would still offer an above market yield even if it halved the payout. That would potentially make this an attractive entry point, but only if it can stem the outflows in the Consumer division.
With that in mind, we'll need to see what the plans are before we can consider turning more positive.
Centrica says factors including the cap on default tariffs, warmer than normal weather, falling natural gas prices and outages at the Dungeness B and Hunterston B nuclear power stations will impact first half performance.
However, full year guidance for adjusted operating cash flow of £1.8-£2.0bn, net debt of around £3.0-£3.5bn and cost savings of £250m, remains unchanged. That's due to cost savings, which total £58m so far this year, and capital discipline both stepping up during the second half.
Total Centrica Consumer customer accounts fell by 20,000 over the first four months of the year, with growth in North America, Ireland and Connected Home offset by the loss of 234,000 UK Home energy accounts.
Elsewhere, sales in the North American business division were impacted by warmer weather, Connected Home gross revenue was 70% ahead during the period, and oil & gas production from Spirit Energy and Rough was slightly ahead of expectations. Drilling commenced on the Hurricane Energy-operated Warwick Deep well, the first in the three-well programme in the Greater Warwick Area.
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