The fall in wholesale gas and power prices has accelerated Centrica’s pivot towards its customer facing activities, according to a report from ratings agency Moody’s.
Last July the British Gas owner announced a major strategic shift away from its loss-making upstream gas and power businesses and towards its more profitable downstream businesses – energy retail, services and technology. It said it would invest £1.5 billion in its customer focused operations over the following five years.
The report from Moody’s said falling commodity prices have quickened the pace of the transition. It said the company is “reducing investment in oil and gas production, selling generating assets, and investing organically and through small acquisitions in technology and services, which we expect to reduce Centrica’s commodity exposure”.
It noted the sharp decline in wholesale gas prices, which fell by around 50 per cent between early 2014 and mid-January this year, in turn pushing down wholesale power prices by around 40 per cent.
According to Moody’s Centrica was heavily exposed to the price falls through its generation businesses and exploration and production (E&P) operations. It said the decline in earnings from E&P was largely responsible for its 2015 operating profits coming in 11 per cent lower than the previous year, and 46 per cent lower than the year before that.
Centrica expects to cut oil and gas production to 40-50 million barrels of oil equivalent (mmboe) per year – down from 78.7 mmboe in 2015 – by scaling back investment in the North Sea and exiting positions in Canada and Trinidad and Tobago. “We estimate E&P will account for about 26 per cent of the company’s EBITDA in 2016, down from 48 per cent in 2014,” the report said.
As part of its refocus on downstream activities, in April Centrica announced it was buying Danish energy trading and management company Neas Energy for £170 million, saying it would invest a further £30 million in the company. Several weeks later it revealed the purchase of combined heat and power business Ener-G Cogen for £145 million. The supplier unexpectedly sold off £700 million of new shares to fund the acquisitions as well as to pay down its debts.
Last month Moody’s confirmed Centrica’s long term credit rating as unchanged at Baa1. Lead analyst Graham Taylor said the rating reflected its “demonstrated commitment to reducing leverage”, its “leading market position” and its “consistently strong performance” in the UK retail market.
