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Why are Centrica shares cooking on gas?

Since hitting a 52-week low of 65.78p on 21 October last year, Centrica shares have jumped 49.2% to close at 98.14p on Friday 10 February.

The Centrica [CNA] share price has more than tripled since slumping to about 30p after the UK entered its first coronavirus lockdown in 2020. Over the past year alone, shares in the British Gas owner have risen more than 25% as soaring fossil fuel prices boosted the energy sector. 

With the shares still down more than 20% on the levels of five years ago, and with the company having improved its balance sheet, could the stock be poised to make further gains? Investors will gain a deeper understanding of the firm’s near-term prospects when it reports full-year results and offers forward guidance on Thursday. 

Clawing back lost ground

Centrica shareholders have had a hard time of it over the last decade. The shares fell from highs of more than 400p in 2013 to a record low of 29p in March 2020. It’s been a long road back from that lockdown-era low, with the shares now hovering around the 100p level. 

The 2022 results are expected to be broadly positive. The company upgraded its full-year guidance for the second time in two months in January, with management saying they expect adjusted earnings per share (EPS) of more than 30p. Bosses added that net cash should exceed £1bn on the balance sheet. At the half-year mark, adjusted EPS came in at 10.2p. 

The FTSE 100-listed company also announced a share-buyback programme in November, suggesting that cash may be available to restore the dividend soon. The company suspended its dividend in the wake of the pandemic in 2020 and has not yet commented on when dividends will be reinstated. 

However, the decision to buy back shares while households struggle to pay their bills drew criticism from consumer rights groups. Centrica came under fire again this month as it was ordered to stop using debt collectors to forcibly install pre-payment meters in the homes of hard-up customers.

Where next for Centrica shares?

Since hitting a 52-week low of 65.78p on 21 October last year, Centrica shares have jumped 49.2% to close at 98.14p on Friday 10 February. The FTSE 100 was up roughly 13% over the same period. “The shares have been on a slow move higher for the last three years and have seen a decent uptrend since October’s one-year low,” comments our chief market analyst Michael Hewson. 

“The momentum that drove the move above 90p has continued through to the 100p level. While the stock remains above support at 90p, there may be potential to move up towards 120p in the coming weeks,” added Hewson. 

Centrica price chart, May 2022 - present

Source: CMC Markets

Other analysts seem to agree that Centrica stock may have further upside potential. Forecasts collected by the Financial Times in February show that, among a group of 17 analysts, five rated the shares a ‘buy’, 10 ranked them ‘outperform’, and two labelled them a ‘hold’. There were no ‘underperform’ or ‘sell’ ratings in the sample. Furthermore, of the 14 analysts offering a 12-month price target for Centrica shares, the median estimate of 132.5p represents an 35% increase from Friday’s closing price of 98.14p. The high estimate of 170p implies a 73.2% increase versus that closing price, while the low estimate of 50p would entail a 49.1% decrease. 

In spite of this positive consensus view, risks remain. With gas prices having fallen from their 2022 peak, the coming months could bring the energy sector back down to earth. Meanwhile, missed payments from struggling customers could dent profitability. And even if the shares do move higher, they may never again hit the dizzy heights of a decade ago. Much will depend on the company’s strategy as it, like other British energy firms, seeks to adapt to the UK government’s commitment to reduce greenhouse gas emissions by 100% from 1990 levels by 2050. Centrica is due to announce preliminary full-year results at 7am on Thursday 16 February.

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