2020 was a tough year for Centrica (LSE:CNA) and its share price. Besides crashing by nearly 60% over the first three months of last year, it later dropped out of the FTSE 100 index. But despite this massive blow to the business, the stock is back on the rise. In fact, over the last 12 months, it’s up by almost 75%!
So the question is, can the Centrica share price recover to its pre-pandemic levels in 2021? And should I be adding the company to my portfolio?
The rising Centrica share price
Centrica is a utility provider for both businesses and residential properties. The firm suffered a £362m operating loss last year, primarily due to the disruptions from Covid-19. After all, with office buildings being mainly empty and regulators placing price caps on energy tariffs, the operating environment for the business has not exactly been ideal. So why is the Centrica share price going up?
Despite the seemingly poor performance, 2020 losses were actually halved compared to 2019. Meanwhile, as the economy begins to reopen, energy price limits are being lifted, easing the pressure on the company’s profit margins. In addition, the restructuring process of Centrica has also continued with the sale of its North American operation, Direct Energy. The deal flooded the balance sheet with £3.6bn of cash. And with its newly strengthened financial position, the management team cut down debts by £412m.
Overall, while the restructuring process is far from finished, it looks like the worst may have passed. And given that the Centrica share price is rising, I think it’s fair to say that I’m not alone in that opinion.
Some rising concerns
As encouraging as these results may be, the business still faces a considerable level of risk. The most prominent is the falling number of British Gas energy customers. While this figure remained relatively unchanged in the second half of 2020, it fell by around 2% in the first half. That’s the equivalent 164,000 customers switching to a competitor. What’s more, this decline included the additional 85,000 customers gained after the Robin Hood Energy acquisition.
Today the company has around 6.9m residential energy customers. By comparison, in 2015, this figure was closer to 14.6m. Needless to say, the company has performed poorly in retaining its customers over the years.
Whether the firm’s new strategies will be capable of reversing the falling popularity of British Gas within the residential energy sector has yet to be seen. But if it fails to do so, then Centrica’s customer numbers are likely to continue falling, taking its share price with it.
The bottom line
As the economy begins to reopen and people return to work, Ofcom has already started lifting the energy price caps again, helping Centrica’s profit margins. This may be sufficient to get the business back to its pre-pandemic levels in 2021. However, I remain pretty sceptical about its long-term prospects.
At this stage, I don’t think there’s enough information to determine whether the company’s restructuring will be sufficient to turn it around. And therefore, it’s staying on my watch list for now.
