Shares in focus: Fire up your portfolio with Centrica
Phil Oakley Jan 18, 2013
Centrica shares are good value and pay healthy dividends, says Phil Oakley.
Centrica is an energy company best known for its British Gas brand. It supplies gas and electricity to 15.8 million household customers in Britain as well as one million business customers. British Gas installs gas boilers and central heating and also supplies its household customers with insurance products for central heating, gas boilers, plumbing and drains and electrical problems.
Centrica is also a big producer of energy. It explores for and produces oil and gas from fields in the British and Norwegian parts of the North Sea. It owns eight gas-fired power stations, some wind farms and has a 20% stake in British Energy and the electricity from its nuclear-power stations.
Its Rough gas storage field stores gas under the North Sea and is the biggest facility in Britain. Centrica also owns a North American business called Direct Energy, which supplies energy to domestic and business customers as well as producing its own gas and electricity.
Centrica’s roots can be traced back to the days of the nationalised gas industry. It became a separate firm in 1997 when it was spun off from the privatised British Gas plc. It started out as the only supplier of gas to British households but lost this position when the market opened up to competition in 1998. To replace the loss of business, Centrica tried to turn itself into a household services firm.
It aimed to make money by selling lots of different services to its millions of gas customers. So it went on a shopping spree and bought the AA for £1.1bn in 1999. This was followed by telecoms firm One-Tel and the Goldfish credit card in partnership with Lloyds Bank. This strategy failed and the AA and Goldfish were sold. An attempt to build a European energy-supply business was also thwarted as the prices for companies rose sharply in the mid 2000s.
So Centrica reverted to what it knew best: selling energy. It began selling electricity to its customers and quickly built up a decent share of the British market. It also started buying gas-fired power stations, wind farms and gas storage assets. But Centrica’s big gas-supply business caused it lots of problems.
As it has to buy lots of gas to supply its customers, soaring wholesale prices made the business very uncompetitive compared with its rivals, who could use their power stations to soften some of the blow. It also meant that it had to put through big price increases to customers that garnered a lot of bad publicity.
A new strategy saw Centrica buy more energy assets to provide a hedge against rising gas prices. In 2008, it bought 20% of nuclear-electricity company British Energy. During the last three years it’s also spent heavily buying gas fields in Britain and Norwegian parts of the North Sea. As a result, Centrica is now one of the strongest firms in the UK energy market.
The chief executive
Sam Laidlaw has been chief executive since 2006. Before joining Centrica he worked for oil industry heavyweights Shell and Chevron. His background in the oil business has been helpful to Centrica as the company has become a bigger producer of energy for its customers. He was paid £1.3m in 2011.
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Should you buy the shares?
Centrica’s big investments in the North Sea are paying off. In fact, it is now beginning to look more like an oil and gas company than a domestic power supplier. While its gas power stations are struggling to make money, production from its gas fields is growing nicely.
The fact that Centrica can supply more of its own gas needs gives it an advantage over its competitors, who have to buy it from third parties. On top of that, gas and oil production is becoming a bigger part of the company’s profits.
It’s true that the taxman takes a large slug of these profits, but Centrica is now far less dependent on its volatile domestic energy-supply business and its yo-yoing profits. It also means that the company’s profits and dividends should continue to grow steadily.
In our view, Centrica is a very low-risk investment in the British utility sector. Unlike some electricity and water companies, it has not stuffed its business full of debt and has good cash flows. Its profits and dividends are also unregulated and not subject to price controls. In Direct Energy it has a good business in North America that continues to do well while becoming increasingly valuable.
Yes, there’s some uncertainty about its possible investment in new nuclear power stations and the returns on offer from wind farms. However, Centrica has vowed to be cautious and avoid silly projects. All in all, we think Centrica shares are good value.
With growing profits and a prospective dividend yield of more than 5%, investors could make good money owning the shares over the long haul. They can do this by reinvesting their dividends in new shares and watch their investment compound and grow. Indeed, buying some Centrica shares could fire up your portfolio.
Share price: 333p
Market cap: £17.3bn
Net assets (June 2012): £6.0bn
Net debt (June 2012): £4.5bn
P/e (current year estimate): 11.9 times
Yield (prospective): 5.2%
Interest cover: 4.4 times
What the analysts say
Average price target: 343p
S Laidlaw (CEO): 2,521,176
N Luff (FD): 647,052
R Carr (chairman): 58,361
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