Gas is getting cheaper, but will Centrica benefit? Analyst John Burford has a hunch that it will and names a price target for the shares.
I am veering a little off-piste this week with coverage of Centrica (LSE:CNA), owner of British Gas, which has had very little favourable press coverage for years. It ranks very low in consumer satisfaction reports, and the share price has suffered badly as sentiment has become very negative.
In fact, utility customers have been switching in high numbers, sometimes with poor results as many newbies have floundered (out of the frying pan and into the fire!). But British Gas still remains the largest UK domestic energy supplier.
And with extremely high wholesale energy prices making the usual advice to 'shop around' redundant, the retail energy market has been thrown into disarray, and government intervention has been deemed necessary. Consumer price caps are now the rule.
Surging energy prices are dominating the financial headlines. Many are forecasting further hikes – and that is why odds are growing that they are about to stage at least a major correction.
Interestingly, wholesale natural gas prices have tumbled in recent days, with the London natural gas price having halved since 16 June. That is one major correction!
And if the energy suppliers hedge forward purchases now, they would stand to benefit from huge margins over the soon-to-be higher price caps this autumn.
The implication is stark – huge profits await energy companies if they follow this path.
Here is the long-term price chart:
Past performance is not a guide to future performance.
The shares have been in a nine-year bear market as customers have left British Gas in droves. But is the tide now turning as consumers see the benefit of moving back to an established player that is highly unlikely to fold, as so many newcomers have?
After all, there is little price differential between companies in this era of price caps.
I believe the odds are that the company will re-introduce a dividend as soon as margins are set to improve. That should boost the share price and I have a target at the 150p area and could possibly move higher.
John Burford is a freelance contributor and not a direct employee of interactive investor.
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