Some people have been concerned in recent weeks about the dip in the FTSE 100 index. However, not all companies are struggling. In fact, Centrica (LSE:CNA) is bucking the broader trend and doing very well. Centrica shares are up 3.5% over the past month and 52% over the past year. Here are a few reasons why the stock is doing so well.
Long-term deal agreements
As an investor, if I can have certainty of future revenue for a business, it gives me a lot of confidence. Given the nature of energy provision, Centrica does arrange for some deals that take place over the space of many years.
For example, on Tuesday news broke of a 15-year deal between Centrica and Delfin for the supply of natural gas. The agreement is worth £6.2bn, and means that Delfin will provide Centrica with a million tonnes of liquefied natural gas a year. This provides enough energy to heat roughly 5% of UK homes.
Clearly, Centrica wouldn’t have entered into a deal of this length unless it was confident that it has enough demand for the order. I see this as a good sign that the company will perform well in the long term.
It should also help to de-risk the business from reliance on provisions from Europe, given that Delfin will be supplying the gas from the US.
Continued earnings momentum
A couple of weeks ago the business held its AGM. Even though the full-year results only came out a few months ago, the AGM was an opportunity for a short update on how 2023 is looking.
The firm said that performance so far this year had been strong and that profit expectations were at the top end of the forecast range.
It spoke of a “significantly higher” adjusted operating profit in the Retail division. This is due to a “material positive impact in British Gas Energy from allowances in the UK domestic default tariff cap”.
The positive outlook has certainly got people talking about the potential for a solid year and has been leading some investors to pile in and buy the stock.
However, a note of caution is that the proof of the pudding is in the eating. Buying based on speculation can sometimes go wrong if actual results in the future don’t meet the high expectations.
More storage is good for business
Finally, there has been a lot of chatter around recent news regarding the Rough gas storage facility.
At the end of June, the firm announced increased gas storage capacity at the Yorkshire site, which is the largest in the UK. It has been upped from 30bn to 54bn cubic feet.
As a risk, the storage facility isn’t that large on an absolute level. In fact, it could only supply the average UK usage for six days.
Yet the news is positive overall for the share price because it allows better management of gas supply from right here in the UK. It reduces reliance on external provisions, which in turn should help to keep prices down for customers. Ultimately, if the company can still preserve profit margins but customers access lower prices, it’s a win-win.
