In the 1990s, the new companies Centrica (LSE: CNA) and BG Group were formed from the demerger of British Gas. This was part of the process of deregulation and restructuring that led to the complete transformation of the UK energy industry.
A year after the demerger Centrica lost its gas supply monopoly, but in return it was able to supply domestic electricity. It then tried to diversify further by launching the Goldfish credit card, and then acquiring the AA, but later decided to refocus on energy supply.
Recently, it has been striking a whole series of multi-billion-pound deals around the world to increase its energy output, from Qatar to the Netherlands and Norway.
Just a few months ago it struck a new £10bn, 20-year deal to supply shale gas from Cheniere Energy in Louisiana to UK homes. This is an agreement that will play a crucial role in ensuring the UK’s energy security in the future.
By acting as an intermediary between Cheniere Energy and the British consumer, Centrica is looking to profit from the cheap shale gas being produced in the US, which it can sell at a considerably higher price in the UK.
This deal also shows Centrica’s strategic prowess and willingness to think big, and it is particularly this positive approach that is paying off in enhanced profits.
Impressive profits growth
High energy prices in recent years have also boosted Centrica’s profits, and the share price has been climbing steadily. The profits growth in recent years has been impressive, and I expect the outlook for future growth to be good.
As with any energy company, there is always the uncertainty of a fluctuating energy price. A fall in gas prices could put a dent in the firm’s profits.
But despite these negatives, and even though the share price is near its all-time high, the company still seems very reasonably priced, at a forward P/E ratio of 13.
With both profit and dividend yield expected to climb, Centrica now represents a decent income play, which finds a balance between the excitement of growth and the safety of value. I think it is worthy of serious consideration for your portfolio.
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> Prabhat owns none of the shares mentioned in this article.