City warms to Centrica

A series of profit warnings forced Centrica to slash its dividend by 30% in February. It came as no surprise after commodity prices had crashed and the gas supplier had failed to sell a trio of UK gas-fired power stations. There has been progress, however, and the relief rally continues.

Lower prices for oil and gas are expected to wipe out gains made in downstream profitability (post-production phases through to the point of sale) in Centrica's first half. Management is still taking a red pen to capital expenditure budgets and is slashing costs across the group, but the balance sheet does, at least, look stronger. The company has issued over £1 billion of Hybrid securities, which generally contain characteristics of both debt and equity, and its Lincs wind farm debt has been sold, generating cash inflow of £176 million.

Colder weather in the UK and North America brought British Gas and Direct Energy in ahead of expectations, as customers whacked up the heating. Gas consumption jumped by 10% and electricity was up 2% at British Gas, with growth of 1% in gas consumption at Direct Energy. More stable infrastructure, market redesign, and management action should mean additional costs aren't repeated this year, either, helping Direct grow operating profit. British Gas has also halted a customer exodus, with client numbers stable at 14.8 million. Unfortunately, this hasn't been mirrored elsewhere in the business.

"The trend of customer losses has not stopped, particularly in Direct Energy: -3.3% in BGB, -1.9% retail customers in the USA and -4.7% services customers in the US," said JP Morgan.

Centrica Energy has continued its reign of cost-cutting, still aiming for a 25% reduction in capital expenditure this year to £800 million, and 40% next year to £650 million. A £100 million drop in cash production costs is also expected by 2016. Production is in-line with forecasts so far this year and should hit 75 million barrels of oil equivalent (mmboe) for 2015.

There are still many risks surrounding Centrica, namely weak commodity prices, how the weather and its assets perform and the uncertainty of the UK General Election and the Competition and Markets Authority (CMA) investigation.

JP Morgan added: "Overall we believe this is a largely neutral IMS, although the fact that there is no further negative surprises is probably a bit reassuring. Centrica continues to expect the outcome of the strategic review for July."

That perhaps explains the modest rise in the share price Monday, extending the recent rally from a five-and-a-half-year low at 234p last month.

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