Utility business and British Gas owner Centrica (LSE:CNA) has been suffering in recent months as Covid-19 has plagued its operations. It has cut 5,000 jobs and its share price has been slipping. Nonetheless, the Centrica share price enjoyed a spectacular rise yesterday morning. This was on the back of the news that it is selling its North American business Direct Energy to NRG Energy for around £2.85bn. This was a significantly higher valuation than expected and great news for the group’s bottom line.
Getting out of North America
The Centrica share price jumped over 30% on opening. The major benefit to Centrica getting rid of Direct Energy is that it can use the proceeds to greatly reduce its debt, while simultaneously contributing to its £522m pension deficit. It also seems like a good time to be getting out of the North American market, where there is no sign of the pandemic slowing. Lockdowns have reduced industrial demand for energy, and this has been bad for Centrica’s business.
The FTSE 250 company, which lost its place in the FTSE 100 index last month, has a market capitalisation of £2.8bn, earnings per share are negative, and it is not expected to pay out a dividend in 2020. Along with the announcement of the sale, the company reported a half-year loss of £135m. Centrica put this down to the coronavirus pandemic, low commodity prices, and warm weather. On an adjusted basis, underlying profit dropped 14% to £56m.
Competition is rife in the utilities sector and consumers enticed by lower prices routinely switch provider. In recent years this has made it difficult for Centrica to stay ahead of the game. Earnings for the first half of the year fell by 19%. Over 62,000 British Gas customers left the company during this time.
While Centrica’s consumer division made a profit, its business division made a substantial operating loss of £4m. It had previously noted its plans to sell Spirit Energy and its nuclear power business, but for now, those are on hold. I think getting rid of these would further boost the Centrica share price.
Is the Centrica share price stabilising?
The sale of Direct Energy will go a long way to eradicating net debt. It should also help with streamlining its operations, improving its balance sheet and preparing its transition to a carbon neutral society with confidence. Upon approval from regulators and shareholders, the sale is expected to complete before the end of the year.
The Centrica share price has been trending downwards for the past seven years. As it has undoubtedly been at an all-time low since the March market crash, some now see this stock as oversold. There’s no doubt it still has a rocky road ahead, but the sale of Direct Energy is definitely a move in the right direction. I think the future sale of Spirit Energy and its nuclear division would offer further stability, but it could be some time before that happens. As the company concentrates its efforts on improving its customer base in the UK and Ireland, it may be an opportune time for risk-taking investors. Nevertheless, I would approach with caution as a second wave of coronavirus could cause further trouble ahead.
