I expected a return to profit might herald an upswing for Centrica (LSE: CNA). But that’s exactly what didn’t happen Thursday, as the energy supplier reported a first-half operating profit of £1bn. No, despite the big reversal from a £338m operating loss in 2020, the Centrica share price opened weakly.
The drop is only small, at around 1.5% at the time of writing. And a deeper look makes this latest update a little less exciting. The thing is, the big headline profit is a statutory figure, as is last year’s loss. And on an underlying basis, things are nowhere near as dramatic.
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Adjusted operating profit in the half (excluding the now-sold Direct Energy) stayed pretty much flat, at £262m. Adjusted EPS gained 6% to 1.7p. And free cash flow improved by 4% to £524m. That’s good, if modest, progress. But it’s not what’s making me wonder if it’s time to buy Centrica shares now.
No, what I’m looking at is Centrica’s net debt. At just £93m, it’s fallen 97% from the £2.998bn recorded at 31 December 2020. The sale of Direct Energy in January, for $3.6bn, is what did it. It also raised a £608m exceptional profit, which boosted the headline statutory figures.
Centrica share price attractive?
But it does represent what I think it the right way to go, as Centrica has moved to focus on its UK and Ireland business. Yet if Centrica is doing the right things, why am I hesitant and not rushing to buy? Some of it is highlighted in the words of chief executive Chris O’Shea, who said that “we continue to make good progress towards the simplification of our company. Although there is still a lot to achieve, our turnaround remains on track, our balance sheet has been significantly strengthened“.
Although I like the progress I see so far, we are still very much looking at a work in progress. On that basis, it’s still hard to build a picture of the eventual shape of the company that will emerge from this metamorphosis. And that makes it tricky to put a fair valuation on the Centrica share price.
That zero business
There’s something else in Mr O’Shea’s words that gives me pause. He spoke of “the path to net zero“. That is something hanging over the whole of the industry. And I find it hard to even guess at what the energy landscape is going to look like in the next five years, never mind a couple of decades from now.
Oh, and these results come from a period of rising fuel prices, which gave upstream operations a boost. Oil is around $70 per barrel now. And while a few years ago I’d have considered that to be a sustainable level, today I’m less confident. I can’t help thinking prices could continue to be volatile over the coming years.
So, on the one hand, I think I’m seeing a well managed recovery and I’m tempted by today’s Centrica share price. But against that, there’s too much industry uncertainty for me at the moment. For now, Centrica can stay on my watchlist.