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As British Gas Owner Centrica PLC Looks To Shrink, SSE PLC Is Expanding

The owner of British GasCentrica (LSE: CNA), announced its first-half figures this morning, along with the results of its strategic review. 

The company reported a 15% rise in adjusted earnings during the first six months of the year. Revenue fell 2% to £15.5bn, from £15.7bn reported a year ago. Earnings before exceptional items fell 3% to £1bn as higher profits from customer-facing businesses were offset by lower profits at Centrica’s upstream gas and power businesses.

Overall, Centrica reported adjusted basic earnings per share of 12.3p for the first half, up 17% year-on-year. The company also slashed its interim dividend by 30% following an earlier decision to reduce the payout. 

Alongside these results Centrica also announced the results of its strategic review of the business, which was initiated “in light of significantly changed circumstances“. 

And following the review, Centrica has concluded that it needs to refocus its growth efforts on customer-facing activities. Management has decided that the company will divert £1.5bn of capital from its upstream business that focuses on exploration, production and power generation, towards downstream, customer-facing operations such as British Gas. Management is looking to cut day-to-day group costs by £750m between 2015 and 2020. 

6,000 jobs will go at the company’s upstream arm as part of these changes. However, the group will increase its headcount in other areas. A net reduction of 4,000 staff is expected overall.

Capital spending will be limited to no more than £1bn per year. £250m will be spent over the next five years growing the company’s service businesses with the UK and North America. A further £700m will be spent over the same period growing Centrica’s energy and power distribution segment. £500m will be spent to improve capacity and £150m to improve energy marketing and trading activities. 

Improving cash flow is another key strategic target. Centrica said it aims to increase operating cash flow by 3% to 5% per year, underpinned by near-term efficiencies. Cash flow growth will be the basis of the group’s progressive dividend policy. 

Will take time 

City analysts have already started to weigh in on Centrica’s restructuring plan. The consensus seems to be that the company is facing many execution risks going forward, but over the next few years, if everything goes to plan, Centrica’s health should improve. 

Nevertheless, it’s clear that Centrica’s turnaround will take time and investors may find a better return with SSE (LSE: SSE).

Indeed, as Centrica shrinks, SSE is restructuring to improve returns, selling off low return assets in favour of assets that generate a high return on investment and boost shareholder returns. 

For example, this week SSE entered into an agreement with French oil giant Total to acquire a 20% interest in four North Sea gas fields and the new Shetland Gas Plant. Total will remain the operator of these assets, and it is expected that this acquisition will enhance SSE’s adjusted earnings per share by up to 5p from 2016/17 onwards. 

The deal should help SSE maintain its lofty dividend yield for the foreseeable future. At present, the company supports a yield of 5.9%, and the payout is covered 1.3 times by earnings per share according to company figures. Centrica’s dividend yield stands at 4.4%, and the payout is covered 1.5 times by earnings per share. 

Slow and steady

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.