Centrica – what’s the latest on the stock?

Shares in Centrica have rallied an impressive 28% from February lows, keeping the 9-year sideways channel in play. Making the all-important break above the 200-day moving average in March was also significant, given that it’d been a significant hurdle since late 2013, so this is significant.

Recent news about British Gas losing nearly a quarter of a million customers in Q1 2016 is a concern for its owner Centrica, yet the number represents a mere 1.5% of domestic customers. Centrica actually has about 28 million customers in the UK and United States. In fact, despite this loss of custom (which is after all relevant to just one string in Centrica’s bow), Centrica appears on track to deliver on plans set out at its FY 2015 results on 18 February.

Of particular interest to shareholders and potential investors will have been a good performance thus far in exploration & production activities, which have of course benefitted from the rally in crude oil prices. Sentiment remains bullish on oil too, despite the failed Doha meeting and waning confidence that a solution to the supply glut will come from that part of the world.

Bullishness is in fact evident in a resurgence of demand for US Energy high yield corporate debt. Considering that sector as one that’s usually the preserve of more sophisticated investors, one might assume such ‘informed’ buyers are confident about an imminent rebalancing of the oil market.

Sure, Centrica overinvested in exploration & production in the run-up to the 2014 market top, but so did everyone else! That led to a 30% dividend cut that still leaves an attractive 5% yield at the current share price. That’s important because even though we’re seeing confidence in commodities, it’s yet to be seen in what state the crude oil market will settle. It must settle in order for companies like Centrica to take stock of it.

Fundamental analysis

Centrica shares are currently trading at 15.2x 12-month forward earnings, a 19% discount to the sector average. This makes Centrica possibly the most reasonably priced of all the UK’s listed utility companies along with National Grid. For us, Centrica wins out because if its higher exposure to the upstream and therefore potential for good capital gains, while offering the highest dividend yield in the sector at the current share price.

Centrica; 9-yr, monthly

Centrica; 2-year, daily

Technical analysis

The monthly chart illustrates the 9-year trading range for Centrica shares, while the daily chart shows the major failure of support at the end of 2016. With the 220p level now support once more, the integrity of the trading range has been restored. Shares have support at the key 200-day moving average, with oil prices at tentatively high levels. We’d expect shares in companies exposed to upstream oil & gas to remain under pressure in the near term.

With Centrica shares just about tracking their 200-day MA, the current outlook is just about bullish with the moving average coinciding with support in a narrow rising channel. Bears should watch out for a break below as a sell signal that could indicate further downside towards the 50-day MA and major support at the floor of the 9-year sideways range. If shares get down to there we may have an entry point for a long trade, while the journey south could be ridden with a short position.

What the brokers are saying

82% of brokers covering the stock are saying either ‘Buy’ or ‘Hold’ while just 18% say ‘Sell.’ The most bullish broker, Whitman Howard, is looking for 49% upside while Societe Generale currently has the lowest target price with its ‘Sell’ rating, seeing 24% downside. Consensus is neutral with an average target price of 238p, 3% away from the price as at the close on 22 Apr.