Just six months ago the investment case for integrated gas company Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) was straightforward. With operating profits split roughly equally between upstream and downstream, the company combined the solidity of a utility with the upside potential of an oil and gas producer.
Downstream, Centrica has a dominant 40% share of the market in the UK. But the market is mature and limited, so the company’s presence in the less-sophisticated US downstream gas supply market, which chipped in 12% of profits in 2012, adds a dimension of growth.
But in a world where a week is a long time in politics, six months is more than enough to devastate an investment case.
Dithering
Upstream, the business has suffered a series of political blows. First, dithering and EU interference prompted Centrica to drop out of a consortium to build the next generation of nuclear power stations. Then Tory minister Michael Fallon ruled out subsidising investment in gas storage. Uncertain energy policy has also led to Centrica pulling out of the Race Bank offshore wind project and holding off from building new gas-fired generators.
But the most savage blow was the threat made last September by Labour leader Ed Miliband, to freeze energy prices if he becomes Prime Minister next year, since when the shares have lost over a fifth of their value. Mr Miliband triggered a beggar-thy-neighbour competition between political parties to champion energy consumers over suppliers, despite Green taxes making up a large slug of energy bills.
Break up
This week Lib Dem minister Ed Davey wrote to regulator Ofcom and the competition authorities, hinting that British Gas — Centrica’s downstream business — should be broken up. The Energy Secretary’s letter reveals his antipathy towards the sector. He said that:
“one of the longstanding concerns about the current energy supply market is that the current Big 6 energy suppliers still see their role as selling gas and electricity rather than having a different business model where the value proposition is to save households energy.“
That’s little encouragement for vertically-integrated Centrica to invest in the UK, and it would be unsurprising if it shifts emphasis overseas. It’s currently leading a consortium buying the Irish state gas company.
Shareholders might hope that political grandstanding will diminish after the General Election, or that a formal competition review will be less harmful than idle speculation. But it’s ironic that a government that boasts of having privatised Royal Mail has inflamed a situation where political interference — or the lack of it — is the biggest swing-factor in the prosperity of a former state-owned utility.
Dividend
Centrica’s yield of 5.6% is attractive if you think populist politicians will eventually turn their attention elsewhere. But the dividend is in danger if price fixing and forced break-ups become the new normal.
