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Analyst Scott Phillips foresees an end to the conditions that have powered the coal station’s shares

by Carlo Svaluto Moreolo

The operator of the UK’s largest coal-fired power plant Drax suffered three analyst downgrades last week, after a strong performance by the shares since the start of the year.

Scott Phillips of Dresdner Kleinwort downgraded the stock from add to hold, suggesting its outperformance this year may be over.

Phillips says in a research note that the strength in Drax’s share price has been driven by ‘a sharp widening in the UK dark green spread’. The dark green spread is the gross income a power generator makes from selling power once the cost of gas, or coal in the case of Drax, and of carbon allowances are taken into account.

The Dresdner Kleinwort analyst notes that UK green dark spreads have widened by 45% in the year to date, thanks to the strength in the oil price. He says that due to the continued strength in coal prices, and a likely fall in oil prices, dark green spreads will fall in 2008 and therefore Drax’s operating profit will shrink.

Lakis Athanasiou of Evolution Securities also downgraded the stock, from add to reduce, saying that Drax’s share price will plummet following a decline in electricity prices.

Athanasiou says: ‘Drax has tracked electricity prices since early March. Electricity prices in turn have moved with crude oil prices. The current forward curve on oil shows a slow decline in the coming year. Assuming crude oil prices, follow the forward curve, then electricity prices will also show a slow decline, with Drax’s share price easing down.’

Edmund Reid of Cazenove changed his view for Drax from ‘in line’ to ‘hold’. Yet the shares this week were winning back the lost ground, trading at 609p on Monday, amid recent speculation that Centrica is mulling an offer for the power generator.