Investors who have dived into British Gas owner Centrica (LSE: CNA) hoping to pick up a bargain have suffered yet more disappointment, with the stock falling another 9% year to date. Measured over five years, it is down 63%. Can it finally make a comeback?
I’m also looking at a very different stock that has reported today, Kurdistan-based oil explorer Genel Energy (LSE: GENL). Now this should be a far riskier option, but in many respects it isn’t. As Roland Head points out, the company has almost no debt, which is very unusual for this type of operation, and highly comforting that fact is too.
It also generates material free cash flow, with today’s full-year 2018 results showing net cash flow of $164.2m, up 66% from $99.1m in 2018. Unrestricted cash balances stood at $334m on 31 December 2018, up from $162m one year earlier, while net cash of $37m marked a positive reversal from $135m the year before.
Genel’s Taq Taq, Peshkabir, and Tawke oil fields have estimated gross proven and probable (2P) reserves of 563m million barrels of oil (bbls).
The £616m group expects to generate material free cash flow of over $100m in 2019, inclusive of investment in its Sarta and Qara Dagh operations, and investors should reap the rewards as the group “is initiating a material and sustainable dividend policy” and intends to pay a minimum dividend of $40m a year from 2020.
The market response was cool, with the stock down 1.33% at time of writing, as EBITDAX (an indicator of financial performance used for oil and mineral exploration companies that includes exploration expenses) profits fell by more than a third to $304m following a $424m write-down of its Miran PSC asset. That triggered an operating loss of $254.6m.
Despite that, Genel has the balance sheet strength to invest in growth and maximise shareholder value. It’s less risky than many small oil explorers, yet trades at just 4.8 times forecast earnings.
How do you approach a top FTSE 100 stock like Centrica, which now offers a massive forecast yield of 8.6%? With extreme caution, is the only answer to that one. Especially since cover is now a wafer thin 0.9.
Volatile commodity prices have hit Centrica’s oil and gas production business while it faces tough competition from rival energy suppliers that peeled off a massive 742,000 customers from British Gas in 2018.
However, group operating profits still rose 12% to £1.39bn, thanks to growth in UK Home services, North America Home services and Connected Home.
It isn’t easy to be bullish about Centrica as the malaise drags on, while Rupert Hargreaves anticipates another year of underperformance in 2019, amid worrying rumours of a rights issue. The default cap on home energy tariffs will also hit profits. February’s warm weather won’t have helped either.
Asset sales have kept down net debt, which isn’t a major worry, so maybe the dividend could survive. Earnings per share are forecast to drop yet again in 2019, by 12%, although there is light at the end of the tunnel with a 19% rise anticipated for 2020. Centrica is a long, long shot but if you’re patient it might just pay off.
Harvey Jones has no position in any of the shares mentioned. 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.