What a shocker Centrica (LSE: CNA) pulled out of the bag earlier this week. I’d been expecting a poor set of full-year numbers, but the scale of the nightmare took even me by surprise. Operating profits tanked 35% in 2019, it said, caused in part by the impact of the government price cap for its retail division. The shares plummeted back below 70p and to six-month lows in the aftermath.
Terrible trading at British Gas wasn’t the only reason why Centrica investors panicked this week, though. It’s making plans to hive off its exploration and production assets but the poor outlook for crude prices is still hammering performance here.
The firm has eaten a £476m impairment for these assets on expectations of falling oil values in 2020, it announced on Thursday. Worsening estimates could well reduce what it can expect to raise for selling its 69% stake in Spirit Energy when first bids start flowing in shortly too. There might be much more pain in store for Centrica on this front.
IEA slashes forecasts
The poorly state of the crude market was illustrated by fresh forecasts from the International Energy Agency (or IEA). The body has described the likely impact of the coronavirus outbreak as “significant”, adding that we are witnessing “a major slowdown in oil consumption and the wider economy in China”.
Consequently it expects global crude demand to drop by 435,000 barrels a day in the first quarter. This would represent the first quarterly drop for a decade. Moreover, the IEA says that annual demand for the black stuff will come in at 825,000 barrels in 2020. This is down a whopping 365,000 barrels from previous estimates.
… OPEC too!
It’s not just the IEA that has been sounding the alarm. This week the Organisation of the Petroleum Exporting Countries (or OPEC) cut its own forecasts, saying that “the impact of the coronavirus outbreak on China’s economy has added to the uncertainties surrounding global economic growth in 2020, and by extension global oil demand growth”.
OPEC has reduced its own annual forecast by a fifth. It now expects global demand of 990,000 barrels per day in 2020. Some are hoping that the recently-minted OPEC+ group (that is the cartel plus a handful of other major producers) will step up production cuts to support oil prices. But with Moscow yet to agree to the most recent cuts programme, this could prove a wish too far.
Big dividends, huge risk
Key economic datasets (like that in the eurozone) continue to worry and the spread of the coronavirus is a concern too. With that comes the possibility that more downgrades to demand forecasts could be forthcoming. And this bodes badly for Centrica, along with the dedicated oilies like BP and Royal Dutch Shell.
Shell has just tipped to its cheapest since September 2016, while BP is trading barely above recent two-and-a-half-year troughs. These shares, like Centrica, might be carrying bulky dividend yields for 2020 (of 7% and above). Though the threat of prolonged share price weakness in this year and beyond as global supply ramps up turns all of the Footsie’s oilies into stocks to avoid right now.
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Royston Wild 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.