Centrica shares could trend higher after selling North American unit

Centrica shares climbed as much as 24% in early morning trading on Friday after the energy provider announced it plans to offload its North American unit NRG Energy.

Cash generated from the the sale, valued £2.9 billion, will be used to reduce the amount of debt on its balance sheet amid challenging market conditions brought about by Covid-19 which has eroded energy demand.

News of the sale helped lift Centrica’s share price, which fell 67% from a high of 93p at the beginning of the year to a low of 30p on 22 April, with the stock still trading 47% lower year-to-date.

Although the recent rally is great news for shareholders after weeks of sideways movement, the uplift and reduction in debt that the disposal of NRG Energy will provide comes at the expense of the British Gas owner’s international ambitions.

‘Centrica delivered a resilient performance against the unprecedented backdrop of the Covid-19 crisis during the first half of the year,’ Centrica CEO Chris O’Shea said in the company’s half-year (H1) results on Friday.

‘Our mission now is to turn around the Company by putting customers at the heart of everything we do and creating a simpler, leaner, more modern and more sustainable company,’ he said.

‘The sale of Direct Energy is a fundamental step towards this, and although we have a lot more to do, we have the people, the brands and the market positions to deliver a successful turnaround,’ O’Shea added.

Centrica is trading at 47p per share at the time of publication.

Centrica half-year results: key figures

Against the backdrop of Covid-19, Centrica has delivered a ‘resilient performance’ with adjusted operating profit falling by £56 million (14%) compared with the same period last year.

Adjusted revenue fell 2% to £26.8 billion and adjusted earnings came in 34% lower than last year at £419 million.

Meanwhile, adjusted operating cash flow fell 18% to £1.83 billion, down from £2.24 billion in H1 2019. However, group net debt increased by 20% to £3.18 billion, with the news likely to have sent the company’s share price lower had Centrica not announced the sale of its North American unit.

Credit Suisse upbeat while UBS eyes Centrica’s stock slump

Analysts at Credit Suisse remain optimistic about Centrica’s share price trajectory in 2020, with the Swiss investment bank reiterating its ‘outperform’ rating for the stock and issuing a target price of 70p – implying a potential upside of 70%.

However, analysts at rival Swiss investment bank UBS believe the stock will fall over the next five months of the year, with the lender reiterating its ‘neutral’ rating and issuing a 30p price target for the stock – implying a potential downside of -26%.

Its clear that analysts remain torn about the direction of Centrica’s share price. But it is worth noting that the stock has struggled to move much in either direction since the Covid-19 crisis hit, with price action ranging between 35p – 44p since May.

Centrica: Technical Analysis

After the first quarter’s brutal sell-off, Centrica has been trying to recover, regaining more than 40% from the mid-April lows pushing back above the psychological £40 level, according to Victoria Scholar, market analyst and presenter at IG.

‘The last three months have seen the stock trade in an ascending trendline with a series of higher highs and higher lows, breaking above the 100-day simple moving average,’ Scholar said. ‘However it is yet to test resistance at the 23.6% Fibonacci retracement line.’

‘Meanwhile a bearish crossover from the stochastic oscillator could also forewarn of potential weakness in the uptrend. Look for resistance at the recent peak at £46.16 and support at the April low at £29.09,’ she added.

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