Surging gas prices set to lift Centrica shares and profits

The Centrica share price has capitalised on high gas prices so far this year, with analysts expecting more good news for the British Gas owner ahead of its second quarter earnings announcement on 28 July.  

The Centrica [CNA.L] share price could be on track to double by the end of 2022 if its upcoming earnings announcement remains upbeat. As of 25 July, shares in the British Gas owner have risen 84.1% year-over-year on the back of strong earnings and rising energy prices. As the company prepares to release its half-year results on 28 July, analysts are expecting another profit beat amid a rise in customers.

Centrica has also benefitted from rising commodity prices in the UK. The company has a substantial position in gas production in UK waters, alongside a 20% stake in the country’s nuclear power plants. As a result, the company has been able to ride the wave of higher energy prices and increase its profits.

Centrica will hope to mirror strong 2021 results

The 2021 annual report was a pleasant read for Centrica shareholders. Adjusted operating profit rose 112% to £948m from £447m in 2020 as the company’s oil and gas business surged. The company used the higher cash inflow to repay a £27m government loan that was used to pay staff during the coronavirus pandemic.

Centrica has exited most of its overseas divisions, following the agreed sale of Direct Energy for £2.7bn. The sale was reported back in the 2021 annual report, with the £624m post-tax gain from the sale being noted as one-off income. As of May 2022, the company has disposed of its Norwegian assets held by its subsidiary Spirit Energy. The value of the deal will likely sit around $1.2bn but this is set to be confirmed in the upcoming half-year results.

Several disposals of assets alongside a good trading year in 2021 have put Centrica in a strong cash position. At the end of December 2021, the company held £5.06bn in cash and cash equivalents. This is an increase of more than 178% from the £1.82bn in cash that it had on its balance sheet at the end of 2020.


Customers relocate to Centrica amid rising energy costs

British Gas has had a decade-long battle with retaining customer numbers as increased competition has led consumers to look elsewhere for their energy needs. However, the collapse of 33 energy providers since January 2021 has helped to bolster the number of customers on the company’s books. Of the 2 million households affected by the closures, industry regulator Ofgem has transferred nearly 700,000 customers over to British Gas.

The UK government has imposed a 25% windfall tax on North Sea oil and gas producers. While Centrica warned that this would harm business confidence in the sector, the company is not challenging the decision The company’s chair, Scott Wheway, warned that, although the company recognised the challenges that rising energy prices are causing customers, the tax could do more harm than good in the long term.

Shareholders are pushing for the company to reinstate its dividend, which it suspended back in 2020. Generously rewarding shareholders when UK households are facing rocketing energy prices would be difficult from a PR perspective. It is expected that the company will reinstate a full-year deal of 3.3p when earnings are released on 28 July, which equates to a dividend yield of approximately 3.8%.

A positive outlook from analysts

There is optimism for the upcoming H1 earnings results. It is forecasted that operating profit for the first half of the year will sit around £1.3bn. This will be slightly higher than usual as a result of the sale of Centrica’s Norwegian assets. Furthermore, the Centrica share price will respond positively if a dividend is reinstated for shareholders.

With Centrica still benefitting from high gas prices and the collapse of competing energy providers, analysts are generally upbeat about the upcoming earnings release. Of 19 analysts polled by the Financial Times, four rated the shares a ‘buy’, nine said they will ‘outperform’, four rated it a ‘hold’ and only one ‘underperform’ and ‘sell’.

The 16 analysts offering 12-month price forecasts gave Centrica a median target of 104.5p. This represents a 18.1% upside on the Centrica share price of 88 44p as of the close of trading on 25 July.

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