It has been a difficult year for Centrica (LSE: CNA). The company’s share price has declined by 14% since the start of the year, and its outlook appears to be somewhat uncertain. It is in the midst of major change and this may lead to further declines in investor sentiment. Furthermore, political risk is also relatively high and this could cause additional disappointment over the medium term.
Despite this, a turnaround is achievable. In fact, a small-cap reported on Wednesday which has generated a 270% return in 2017 following a 90% fall in its share price over a two-year period. This shows that even for the biggest-falling shares, a recovery is possible.
A changing business
One catalyst to push the Centrica share price higher is its new strategy. It is seeking to move away to a large extent from its oil and gas activities. Instead, it will focus on energy services. This is likely to be a more stable industry in which to operate, and could mean that the business returns to being a popular income stock. In other words, with dividend investors highly valuing the reliability and resilience of their income streams, a more robust business model could justify a higher rating for the stock in the long run.
As part of the company’s new strategy, it is seeking to reduce costs. In the current year, it has already achieved half of its targeted £500m in cost reductions. More cuts are planned in future as it seeks to reduce net debt levels to between £2.5bn and £3bn by the end of the year. Lower debt should equate to lower balance sheet risk, which may create more certainty for investors and generate a higher rating for the company’s stock price.
Of course, Centrica’s progress has been hampered somewhat by negative news flow in recent months. Increasing support for the Labour Party has meant the threat of nationalisation is now higher. Similarly, increasing electricity prices for consumers has also arguably made political risk higher for the business. Both of these issues could hold the company’s share price back, although the reality is that rising profitability, lower costs and lower debt levels could offset the company’s risks and allow it to deliver improved share price performance.
In that sense, it has the potential to follow fellow oil and gas operator Empyrean Energy (LSE: EME). As mentioned, it has risen significantly in 2017 following a challenging period. It reported on Wednesday that the 3D survey acquisition phase in Block 29/11 offshore China has now been completed. This means that its key prospects of Jade and Topaz now have high quality modern 3D seismic coverage. This is expected to provide potential resource size estimations for the two prospects within the coming weeks.
Clearly, Empyrean Energy’s future share price performance is likely to be volatile and it is hugely dependent upon news flow. It remains a relatively high risk, smaller company but has shown that it is making encouraging progress with its strategy. Therefore, further gains could be possible as it continues its recovery.
Peter Stephens owns shares of 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