Last week Centrica (LSE: CNA), owner of British Gas, posted a massive £1.1bn loss for the year. Subsequently, its share price dropped about 17%, leaving it down about 50% compared to the same time last year.
This kind of low price makes me wonder if the company is truly worth this little, or if some bad headline numbers have simply seen the stock oversold. As always, the devil is in the detail.
Government influence
Centrica said (though it was far from the main cause of its woes) that its numbers were “heavily impacted” by a cap on energy prices introduced by the government last year that affected about 11 million homes. For me, this was a red flag.
I have long had an aversion to investing in firms that see too much government interference. Please note here, I don’t mean fair government regulation, I mean industries and firms where politicians attempt to curry favour with voters by interfering with a market or firm for non-financial reasons. In my experience, politics and finance just don’t mix.
What makes good politics doesn’t necessarily make for good economic policy, and nor does good economic or business policy make for good political capital. From the point of view of an investor who simply wants to see good returns on their money, these sectors are simply best avoided.
The impact of a government cap (a political rather than economic move) on prices is the exact kind of influence that would make me avoid a stock forever.
Low prices and nuclear problems
Moving away from these political concerns however, much of Centrica’s loss came down to lower commodity prices (from which almost all energy firms are suffering), as well as a number of one-off charges. Most notable of these was a £476m write-down in the value of its oil and gas production assets and a £372m impairment of its 20% stake in the UK’s eight operational nuclear power stations.
Last year saw outages at two of these nuclear stations hitting the UK and spooking investors, as well as the general public, about the health and robustness of our electricity supply.
This month’s numbers come as an additional hit for Centrica as its turnaround had seemed to be making some headway – its share price generally recovering a little ground since about October. This latest news has come close to wiping out those gains.
Centrica is attempting to sell a number of its assets and said last week that it still intends to sell its 69% stake in Spirit Energy this year. The company did say however, that its efforts to sell its 20% nuclear stake couldn’t be guaranteed to succeed in 2020 due to complications coming from its French partner EDF, which is also trying to sell down part of its holding.
Personally, write-downs rarely worry me, as by their nature they are usually one-off. Likewise, some of Centrica’s problems with commodity prices and sale complications are not necessarily a major concern for a long-term investor.
However, the relatively large number of these problems, combined with the political nature of its industry, makes the uncertainty around Centrica too much for me to ignore.
