Centrica Wins Upstream, Loses Downstream

High northwest European gas prices this winter both helped Centrica's upstream business and eroded its customer margins downstream in the UK, it said as it announced its first-half results July 31.

Earnings before interest, tax, depreciation and amortisation (Ebitda) were up 3%, at £1.324bn ($1.741bn). Adjusted operating profit was down 4% to £782mn while adjusted income was down a fifth to £358mn but the company says it is on track to deliver £200mn of savings for the full year, taking cumulative annual savings relative to 2015 to around £900mn. The adjusted gross margin in the consumer sector was down 8% to £1.4bn. This was due to high spot gas prices in the winter as well as higher servicing costs arising from the extreme cold, it said. The adjusted gross margin was down 13% to £507mn in the business sector while adjusted operating profit was down 57% thanks to legacy gas contracts. 

But upstream earnings – there is still peak production from the Morecambe Bay fields, as well as from Rough the former storage facility, both of which are now part of its 69%-owned Spirit Energy joint venture – rose from £140mn to £350mn, up 150%.

(Credit: Centrica)

Centrica CEO Iain Conn (above) said: "We delivered stable gross margin and Ebitda relative to 2017, and adjusted operating cash flow of £1.1bn. We are on track to achieve our full year group financial targets and expect to maintain the full year dividend per share at its current level."

UK customer accounts fell by 1% but the rate of losses slowed compared with 2017. It is awaiting final regulations imposing a temporary default tariff cap in the UK and says it continues "to engage constructively while implementing mitigating actions."

The upstream business continues to provide cash flow diversity and balance sheet strength, it said. After the sale of assets in Canada and Trinidad & Tobago and the formation of Spirit Energy in December 2017 the company has a stronger European E&P business which is expected to deliver medium-term production in the 45-55mn barrels of oil equivalent (boe) range costing capital reinvestment in the range £400mn-£600mn.

The E&P division also includes CSL, which in January 2018 received consent to produce all recoverable gas reserves from the Rough asset. In Norway the Oda project is proceeding to plan and offshore installation has started, while an appraisal well was successfully drilled at Fogelberg, with further resources confirmed. Spirit Energy will make a final investment decision on Fogelberg in 2019. A positive final investment decision was made on the Nova oil field, also off Norway, while Spirit had exploration success at the Hades/Iris prospect and has started drilling at the Scarecrow prospect in the Barents Sea.

CSL’s Rough asset delivered strong production during H1 2018 and is expected to produce 9mn-11mn boe, slightly higher than expectations at the start of the year. With the cessation of gas storage, Centrica Storage is "actively engaging with a number of companies" to secure additional gas processing contracts for the Easington plant, in line with the Oil and Gas Authority’s remit to ensure the maximum economic recovery of gas and oil for the UK.

Centrica also said its CFO Jeff Bell is to stand down at end-October 2018 after four years in post, retaining a limited role as an advisor and Spirit Energy director thereafter, until leaving in July 2019. He is to be succeeded by Chris O'Shea, effective November 1 this year. O'Shea has been CFO at leading UK manufacturer Smiths Group since 2015; he held senior finance roles with Shell (1998-2005) and with BG Group (2006-12) including as head of finance for its Europe/central Asia division, BG's largest.