Natural gas prices have surged lately, causing concern among many retail customers about possible increases in their energy bills. A share synonymous with that energy source is British Gas owner Centrica (LSE: CNA). What could the dramatic swings in gas costs mean for the Centrica share price?
Centrica and the role of gas prices
With its well-known gas brands, Centrica is closely associated with the gas industry in many investors’ minds. But in practice, what might gas price changes mean for the company?
First, it could open up new customer groups for it. For example, last month it announced that it would take on around 350,000 gas customers from People’s Energy after that supplier ceased trading. As this was part of the energy regulator Ofgem’s Supplier of Last Resort”process, any costs Centrica incurs as a result will be recoverable. Longer term, this could help boost its customer base, which has long been in decline.
Secondly, price changes could impact the results at its marketing and trading arm. Depending on what positions the trading operation takes, this could be either positive or negative. Even at the interim stage, the company noted that “volatile and unpredictable commodity markets created a challenging environment for our core Energy Marketing & Trading trading and optimisation activities.” Since then, volatility has worsened markedly. While the prospect of an unexpected trading windfall cheers me as a Centrica shareholder, overall I see dramatic volatility in wholesale gas pricing as potentially risky for the firm. It walks a tightrope between its customers (many of them already unhappy at gas price rises), global gas price pressures outside its control and regulatory pressures.
Gas price volatility and share price risks
While there may be some upside, I also see potential downside for the company in this situation. Even if gas price inflation doesn’t hurt it financially, it could damage the company reputationally with its customers. That could mean continued decline in residential customer numbers, which at the interim results stage had slipped another 2%.
On the plus side, Centrica retains exposure to upstream gas operations. A surging gas price could potentially help boost profits there. Overall though, the impact of volatile gas prices on the Centrica share price remains difficult to quantify. There are clear risks that surging costs could be hard to pass on to customers without them complaining.
Could the Centrica share price surge like gas prices?
A surging gas price looks theoretically good for the Centrica share price and the company might yet produce strong trading results.
But I’m concerned that it could actually be bad for the business. Unpredictable input prices can be difficult for any firm to manage. They can hurt profits badly and damage customer relationships, something Centrica already struggles with.
Set against that, recent fuel supply problems could help improve long-term demand prospects for a variety of energy sources. That might boost the gas and nuclear areas, in both of which Centrica is involved. The company continues to trade as a UK penny share despite being a key player in the UK energy market. Gas price volatility could actually work against Centrica. So while the Centrica share price could rise, I also fear it may fall amid the uncertainty. I’ll hold my shares but don’t plan to buy any more.
