A steady hand on Centrica’s tiller

Nigel Hawkins says investors should be reassured by Centrica’s recent strategy announcements.

Perhaps inevitably, media reaction to Centrica’s long-awaited strategy announcement focussed on the likely job losses – around 6,000, although some new jobs will materialise.   

With Shell also confirming a further 6,500 lost jobs last Thursday, it was certainly a bad day for employees in the energy sector.

As expected, Centrica’s re-booted strategy marked a sharp move away from exploration and production (E&P) – in which a formidable c£9 billion was invested between 2007 and 2014 – and towards maximising value from its formidable customer base.  

Whilst chief executive, Iain Conn, described Centrica “as an energy and services company”, it is the latter that is becoming increasingly important.  

Centrica’s core businesses have been re-defined – somewhat inelegantly – as “energy supply, services, distributed energy and power, the connected home and energy markets and trading”.  

“Centrica has also decided to treat its UK nuclear power shareholding as a financial investment. If a suitable buyer emerges, Centrica would no doubt be an avid seller.”

As such, an additional £1.5 billion has been earmarked for enhanced investment and operating costs in the new priority sectors by 2020.  

Almost half of this amount is being set aside for business-to-business (B2B) investment as Centrica seeks to re-establish itself as the go-to energy supplier; promoting energy efficiency and new technologies will be key components.    

A further £500 million will be deployed to expand Centrica’s customer base; some of this expenditure will be undertaken in the US.    

Centrica has also confirmed that an additional £250 million will be spent on improving its overall services.  

With his BP background, Conn has concluded that Centrica’s E&P operations lack critical mass: their value has been depressed by the very weak oil price.

Interestingly, given Centrica’s future cash flow projections, Conn’s take on longer-term oil prices seems rather more bearish than that of his Shell counterpart, Ben van Beurden.

Centrica’s E&P focus will now be on the struggling North Sea and the East Irish Sea.

Importantly for investors, Conn has effectively capped Centrica’s E&P investment budget at £600 million per year.

Having sustained serious operating losses on various gas-fired plants, fossil-fuel generation has become a lower priority for Centrica. Furthermore, its wind plant portfolio is now up for sale.   

Centrica has also decided to treat its UK nuclear power shareholding as a financial investment. If a suitable buyer emerges, Centrica would no doubt be an avid seller.  

Overall, on a like-for-like basis, Centrica expects its operating cost base in 2020 to be £300 million lower than that for 2015: the quest to deliver the necessary efficiencies will be pivotal.

Investors will also be reassured by the target of delivering compound growth in operating cash flow of between 3 per cent and 5 per cent per year. 

Achieving this target will underpin the progressive dividend policy, to which Centrica is now committed: its 2015 interim dividend was slashed by 30 per cent.

Despite the eagerly awaited publication of Centrica’s new corporate strategy, there were neither major announcements nor real surprises; this explains why the share price reaction was muted.

Nonetheless, with Conn’s hand now on the tiller, the SS Centrica is being steered away from per cent and towards its extensive customer base.