Centrica’s name implies neutrality. It describes a middle-of-the-road utility just doing its job. That is out of kilter with the UK energy group’s position at the eye of a political storm over household energy costs.
Higher natural gas and power prices mean profits jumped in 2022. Centrica’s low stock rating reflects doubts over the duration of recovery — as well as calls for higher windfall taxes.
Two years back, chief executive Chris O’Shea struggled to garner enough cash flow to invest, never mind pay shareholders. But householders, consumer campaigners and sections of the media are nevertheless furious that Centrica’s 2022 operating profits tripled to £3.3bn.
It has not helped that the utility is embroiled in a row over prepaid energy meters. Agents allegedly installed these in vulnerable households.
However. Centrica’s UK retail business, British Gas Services, which once pulled in £200mn to £300mn in annual operating profit, made nothing last year. It was the Energy, Market and Trading and Upstream gas divisions that made all the running.
At first glance, Centrica’s shares appear to reflect strong financials. They have returned 86 per cent over the past year. That is way ahead of the broader UK market and other utility stocks. Yet the price to forward earnings multiple of under 5 times earnings has never been lower, implying the share return could have been much higher.
Two factors are responsible. First, investors are worried that the energy bull market may be drawing to a close. UK spot power prices are at £143 per megawatt hour, nearly triple their level two years ago. But periods of high volatility are typically followed by long periods of calm.
Second, O’Shea faces as much pressure from the City on payouts as from consumer campaigners and the media. It wants more. They want less.
An increase in the share buyback to £550mn, from last November’s £250mn, popped the shares nearly 5 per cent on the day. Yet cash will keep on building this year. This should tot up to about £2.5bn, after dividends and buybacks, says Credit Suisse. That is worth about 50 pence per share, nearly half the stock price today.
Centrica is either unbelievably cheap or investors doubt its performance is sustainable. The latter is the credible hypothesis.