Centrica: Tough Times, Hanging In

Centrica is a company we perennially find interesting, for a couple of reasons.  They’ve successfully remained UK-owned, which many of their energy-sector peers haven’t;  their strategies have generally been noteworthy, indeed often quite smart – which kinda relates to the first point;  and it’s rarely been plain sailing for them – which comes with the territory.

They’re yet again at an awkward juncture,  needing a new CEO and some substantial asset sales, both to manage their debt and, frankly, to exit from a couple of increasingly difficult sectors – upstream oil & gas production and nuclear power, neither of which are flavour of the month for investors.

Nuclear?  Yes, it’s easy to forget they took a 20% stake in the old British Energy nuke fleet from EDF back in 2009, which didn’t look so clever a short while later – so much so, they’ve never been able to shift it.  Why did they do it?  A couple of ostensible reasons: it was a package deal in which they offloaded some unwanted Belgian assets; and they thought of the nuclear electricity as both green(ish) and “a hedge against the vagaries of global commodity prices“.  There was another (unstated) reason, too: in the 2000′s they had very fairly made a bit of a name for opportunistically picking up big assets at distressed prices – several gas-fired power plants, a big gas storage facility and a huge tranche of electricity from BE – judging the bottom of the market very adroitly.  By 2009 they were just too pleased with themselves, and thought they could do no wrong.

Seems a long time ago now.  But they’ve stuck to their core strategy – excelling (well, doing OK) at retail energy as that sector gets more and more difficult, on a last-man-standing thesis.  Seeing weak hands all around them amongst both the Big 6 and the plethora of failing minnows we’ve talked about recently, they probably still reckon they made the correct bet there.  Even the burgeoning Ovos and Octopuses of this world aren’t finding everything quite as straightforward as they hoped.  With the threat of asset-seizure under a Labour Government gone, and nobody likely to object about an energy retailer doing a steady job (Big-6 or not), Centrica will probably stick with this.

They still need those asset sales, though.  Nuclear is a mug’s game – particularly being strapped to EDF, whom we’ll look at in another post.

ND