What’s going on with the Centrica share price?

The Centrica share price has soared by over 50%. Our writer looks into the reasons for the surge and considers what might happen next.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Saucepan on a gas hob

Image source: Getty Images.

After a challenging few years, things seem to be looking up for Centrica (LSE: CNA) shareholders. The Centrica share price has grown by over half in the past year. It is currently trading around its year highs.

Here is why I think it has been rising and what could happen next.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Gas prices: a mixed bag

With its large footprint in the UK gas market, thanks to owning brands such as British Gas, it might seem that Centrica could be a beneficiary of soaring gas prices. In reality, things are more complicated than that. On the plus side, the bankruptcy of other suppliers has meant hundreds of thousands of customers being switched to Centrica. With its own dismal track record of customer retention, that should be good for the company.

However, Centrica buys as well as sells gas. Gas price volatility could actually end up hurting it, for example in its trading arm. So while the company could turn out to benefit from the spike in energy costs, it is not yet clear whether that will actually be the case.

Back to fundamentals

I think hopes about profit boosts from gas price changes have helped the Centrica share price lately. But I also think that investors have been taking another look at the company fundamentals and questioning whether Centrica really merited its low valuation. After all, while the Centrica share price has soared over the past 12 months, it is still 73% down from where it stood five years ago. In other words, Centrica shares change hands for little more than a quarter of their price in 2016. That’s a dramatic destruction of shareholder value.

While recent performance has not been brilliant – last year’s post-tax loss was £117m, or £432m if only looking at the company’s continuing operations – there have been some grounds for optimism lately. Centrica’s interim results showed free cash flow up slightly and net debt cut dramatically, from £3bn in the prior year period to just £0.1bn. The company turned an operating loss of £338m in the prior year period to an operating profit of just over £1bn. That’s over a quarter of its total market capitalisation. With a stronger balance sheet, higher profits, and better free cash flow, Centrica finally seems to be moving in a positive direction.

Where next for the Centrica share price

The problem, as a Centrica shareholder, is that I have seen the company stumble before even when it has what seems like a good hand of cards.

The current management deserves credit for focussing the company and delivering an improving financial performance. But at the half-year stage, the company was still shedding customers. It reported 150,000 fewer residential customers than in the prior year. Centrica has got into a highly visible dispute with many of its own engineers over working terms. The energy price market volatility could yet hurt profits.

So, while things seem to be going well, I maintain my longstanding concern about Centrica: it struggles to show consistently improving performance over the long term. I will continue to hold my shares for now rather than sell them at a loss, but I won’t be adding any more.

Our 5 Top Shares for the New “Green Industrial Revolution"

It was released in November 2020, and make no mistake:

It’s happening.

The UK Government’s 10-point plan for a new “Green Industrial Revolution.”

PriceWaterhouse Coopers believes this trend will cost £400billion…

…That’s just here in Britain over the next 10 years.

Worldwide, the Green Industrial Revolution could be worth TRILLIONS.

It’s why I’m urging all investors to read this special presentation carefully, and learn how you can uncover the 5 companies that we believe are poised to profit from this gargantuan trend ahead!

Access this special "Green Industrial Revolution" presentation now

Christopher Ruane owns shares in Centrica. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Buffett at the BRK AGM
Investing Articles

I’m listening to Warren Buffett about investing for the future

How does Warren Buffett incorporate an uncertain future into his investment strategy? Christopher Ruane explores what he's learnt from the…

Read more »

Worker on sofa and team on laptop screen talking and discussion in video conference and dog interruption.
Investing Articles

The Alphabet share price has fallen 25%. Time to buy?

The Alphabet share price has fallen sharply in 2022 -- and our writer scents a buying opportunity for his portfolio.

Read more »

Close-up of British bank notes
Investing Articles

How I’d invest a Stocks and Shares ISA to target yearly dividends of £1,350

Our writer reckons he could invest a £20,000 Stocks and Shares ISA to generate substantial dividend income. Here's how he…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

UK shares to buy now: how I’d invest a £1,000 lump sum

Our writer highlights some shares to buy now for his portfolio that he hopes offer both growth and income prospects.

Read more »

Investing Articles

3 top FTSE 100 shares to buy in a recession

Our writer explores three FTSE 100 shares that could protect the value of his stock market portfolio in the event…

Read more »

A Rolls-Royce employee works on an engine
Investing Articles

Could I double my money with Rolls-Royce shares?

Rolls-Royce shares have been on a downward track this year amid ongoing-pandemic related challenges. But is now a good time…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

Down 50%, are Scottish Mortgage shares a bargain growth pick?

Scottish Mortgage shares have been on a steep downward track over the past six months. Down more than half, is…

Read more »

Note paper with question mark on orange background
Investing Articles

4 reasons why I would — and wouldn’t — buy Tesco shares for June

I’m looking for the best FTSE 100 shares to buy in early June. Is Tesco a brilliant blue-chip I should…

Read more »