Accident-prone Centrica crashes again

The British Gas owner has now lost nearly all its impressive recovery from last year’s record low. 

Centrica (LSE:CNA) shares were kept on the ropes by an unforgiving City today, despite the British Gas owner's “mixed bag” results doing enough to retain interest as a speculative income play.

The 17% reversal to just below 70p reflected a £1.1 billion one-off charge on weaker commodity prices and the possibility that a complete sale of Centrica's interests in UK nuclear may not happen this year. There was also no news on a successor to CEO Iain Conn, who leaves at the May AGM.

The blue-chip stock had been as high as 93p in mid-January, having rallied 45% from the low of 64p seen in August after Conn rebased the full-year dividend from 12p to today's 5p.

The stock still trades with a 2020 dividend yield of 6.2%, which with shares near to a record low may tempt investors who think the worst is over for Centrica. Conn's re-positioning of the company as a customer-focused energy services and solutions business should be largely done this year, reflecting most of the nuclear sale and disposal of Centrica's stake in Spirit Energy.

Source: TradingView Past performance is not a guide to future performance

And despite today's 35% slide in full-year operating profits to £901 million, the underlying performance in the second half was much improved on the first half, when falling natural gas prices and the government's default tariff cap impacted the result.

Conn said the company's core customer divisions had momentum at the start of 2020, with energy supply account losses lower in the second half of the year and broadly stable over the past three months following the launch of customer offers in the fixed price market. The number of home energy supply customer accounts still fell overall by 286,000 in 2019.

The anticipated consumer division recovery in 2020 is likely to be offset, however, by the impact of significant commodity price falls affecting upstream operations and nuclear.

This will mean weaker-than-expected operating cash flow in the range of £1.6 billion and £1.8 billion, casting a potential cloud on the dividend outlook after generating £1.83 billion in 2019 and £2.2 billion the year before.

Analysts at UBS warn that the upstream division may be loss-making in 2020, with capital expenditure cuts required for exploration and production to be free cash flow neutral.

The Swiss bank, which has a target price of 105p, added that the recent slide in the Brent crude prices looked to be factored in by the market after a 10% fall for Centrica shares prior to today.

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Describing today's results as another mixed bag, UBS's analysts said:

“The results include several positives on the continuing, customer-facing businesses. Even so, the re-rating we are expecting may not start until the commodity disposals are completed.”

Having pledged in 2018 to offload its 20% interest in the UK's fleet of nuclear power stations by the end of 2020, Centrica today admitted it might not be possible to complete this in one transaction due to operational issues at Hunterston B and Dungeness B. Initial bids for the company's 69% stake in Spirit Energy are expected by the end of March.

Centrica should raise at least £2 billion from the disposals, which will be used to cut debt and may trigger the return of a progressive dividend policy. Borrowings rose 20% to £3.2 billion in today's results and are expected to be in the range of £3.2 billion and £3.6 billion in 2020.

In the aftermath of the dividend cut, Centrica shares tumbled to their lowest level since the company was created out of British Gas in 1997. At just over £4 billion, its valuation means there are still questions over its future as a FTSE 100 index-listed company.