British Gas-owner Centrica (CNA) is facing long-run headwinds that could act as a drag on the share price for months to come. Negative sentiment may even worsen as brokers and investment banks rework their earnings forecasts and ratings in the wake of dismal half-year results (31 Jul) and potential higher costs of servicing its debt.
A large reduction in gas consumption and electricity usage has resulted in a 26% drop in British Gas operating profits to £265 million. Overall group adjusted operating profits slump 35% to £1.03 billion. Centrica takes a £40 million write-down on its Celtic Array offshore wind project and shaves its 2014 earnings per share (EPS) guidance range to 21p to 22p from the previous 22p to 23p.
‘With a new chief executive officer (CEO), at least some of the management uncertainties have lifted,’ says Investec’s Harold Hutchinson and Roshan Patel with a ‘sell’ rating on the stock. Ian Conn has been appointed as CEO in-waiting from BP (BP.) (29 Jul), and is set to take the role permanently from January 2015.
But Investec remains unconvinced this will be enough to steady the ship in the wake of severe headwinds facing the group. ‘We still see the outlook for Centrica as challenging, not least given the ongoing Competition and Markets Authority (CMA) review in the UK, and weak upstream dynamics,’ the analysts spell out. Deutsche Bank echoes these doubts, saying: ‘We expect operating profits and earnings to be down circa 30% year-on-year due to mild weather in the UK (less gas sold) and a negative impact from the US Polar Vortex,’ which relates to steep extra power market charges accrued during last winter’s extreme snowfall and ice storms across much of North America. Sanctions slapped on Russia in the wake of the political crisis in Crimea throw yet more doubt over Centrica’s immediate prospects.
The UK group is believed to have held talks with Kremlin-owned Gazprom over certain asset sales, although the company has refused to confirm this speculation. There is also the potential rising cost of capital, with interest payments on its £5.2 billion borrowings at risk of steep increases if interest rates, as expected, rise. ‘A customer focus looks key to improving political and competitive prospects,’ says Deutsche Bank, and ‘until British Gas starts recovering the shares may continue to trade sideways,’ the investment bank concludes.