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Will Falling Gas Prices Boost Profits At Centrica PLC And SSE PLC?

gasringAccording to a Sky News report, the price of gas for November and December delivery has fallen by 23% so far this year, and energy regulator Ofgem has asked energy suppliers to explain why they have not passed any of these savings on to their customers.

Energy giants SSE (LSE: SSE) and Centrica (LSE: CNA) could come under fire again, but in this article, I’ll explain which of the two I believe is the best buy in today’s market.

Mystery price of gas

We know that both companies source their gas with a variety of short-term and long-term deals, but we don’t know is how these numbers all balance out: are Centrica and SSE benefiting from fall gas prices, or are supplies already contracted at fixed rates?

Centrica, for example, said in July that “Gas and electricity [were] contracted up to three years in advance; majority of requirements for next winter already purchased”.

Centrica also appeared to have anticipated recent falls in the price of oil and gas, saying that “lower commodity prices in 2015 [would be] offset by higher carbon, ROC and network costs”.

Personally, I don’t believe that the big utilities will be slashing prices in the run-up to Christmas: their timely promotion, earlier this year, of fixed-rate tariffs and price freezes, should mean that pressure from consumers has fallen.

Current warm weather also means that consumers won’t be thinking about energy prices as much as usual: according to SSE, average gas consumption per customer was 30% lower in the warm second quarter of this year than it was in the chilly late spring of 2013.

Which should you buy?

Centrica and SSE both offer prospective yields of about 5.7%. SSE has a 2014 forecast P/E of around 13.4, while the figure for Centrica is 14.4. Both have similar levels of dividend cover and both have a market consensus rating of hold.

However, my view is that Centrica might be the better buy in today’s market. Centrica’s share price has fallen by 13% this year, whereas SSE has risen by 16% to near-record highs. I also like Centrica’s greater upstream and US exposure, as well as its ownership of British Gas, which remains a key brand and is the UK’s largest energy retailer.

Finally, Centrica is about to get a new chief executive, ex-BP man Iain Conn, who is likely to be focused on finding a way to revive Centrica’s flagging growth.

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Roland Head owns shares in SSE. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.