5th May 2016 09:08
LONDON (Alliance News) - Centrica PLC shares were under selling pressure Thursday morning after the energy firm unveiled plans to conduct a substantial placing to allow the company to progress its new strategy without the risk of losing its solid credit ratings.
Centrica shares were trading down 9.4% to 209.30 pence per share, the worst performer in the FTSE 100.
Centrica is turning its attention away from its exploration and production business, which focuses on extracting and finding natural resources in the ground, in order to focus on its "customer-facing strategy" based around energy supply, services, connected home, distributed energy and power alongside energy marketing and trading.
The move away from the production and exploration of oil and gas comes at a time when the world market remains in a rout, with oil prices still considerably lower than the highs experienced in the middle of 2014 before prices began to drop.
However, as part of that new strategy, Centrica wants to complete two acquisitions but is concerned that could put its current credit ratings at risk - prompting the company to raise funds from institutional investors through a placing.
"Although the company could operate effectively with lower credit ratings, it continues to believe that the targeted strong investment-grade credit ratings are most efficient for Centrica's business model, given the scale of its energy procurement activities and the resultant need for access to cost-effective short-term sources of liquidity to manage collateral requirements," Centrica said.
The company is aiming to keep its current investment-grade credit ratings of Baa1 with Moody's and BBB+ with Standard & Poor's.
Centrica wants to refocus around GBP1.50 billion of capital that was earmarked for the exploration and production business to its new strategy between now and 2020, but said Thursday this is also taking longer than expected, meaning the funds that will be raised from the placing will allow it to accelerate the new tactic without being caught short.
"While the group continues to explore all options for repositioning its E&P business, the external environment means this is not straightforward, and reallocation of resources towards its customer-facing businesses is currently running below targeted levels," Centrica said.
Centrica said it remains on track to cut investment into the E&P business by GBP500.0 million this year and remains on track to deliver GBP200.0 million worth of cost efficiencies, partly driven by the loss of 3,000 jobs.
However, as the reallocation of funds is taking longer than expected, Centrica plans to issue around 350.0 million shares, which is equal to around 7.0% of its current issued share capital, to institutional investors through an accelerated bookbuild, which will determine the price of the issue once closed.
Goldman Sachs International and UBS Ltd are acting as joint bookrunners and corporate brokers.
Although the price, and therefore the amount raised, has not been declared yet, Centrica indicated it wants at least GBP750.0 million.
Centrica said the placing will allow it to complete two acquisitions worth a total of GBP350.0 million and to lower net debt by a further GBP400.0 million, which in turn will reduce the pressure on Centrica's targeted strong investment grade credit ratings in a continuing uncertain environment.
One of the acquisitions to be funded by the placing is Neas Energy AS, which mainly manages assets within the renewable energy sector, including well-known sources such as wind, solar and hydro but also in power plants fuelled by biogas, thermal power and other sources. It also provides asset management services for utilities, trading houses and logistic firms within the energy sector.
Neas has customers that own around 2,500 assets that have a combined capacity of around 8,600 megawatts, and Centrica will pay around GBP170.0 million for the company.
The other acquisition has not been revealed. Centrica stated a "further customer-facing acquisition" is "nearing completion" on Thursday. Based on the price of the Neas deal, the second acquisition will be to the tune of around GBP180.0 million, but Centrica said the consideration is closer to GBP150.0 million.
Neas reported revenue of around GBP2.20 billion and earnings before interest, tax, depreciation and amortisation of GBP21.0 million in 2015, and the Neas transaction is subject to customary European Union regulatory approvals and is expected to close around the middle of 2016.
When the Neas deal was revealed last month, Centrica made it clear that the consideration was not included in its GBP1.00 billion annual budget for acquisitions, suggesting the deal alone was set to push up its budget by around 17% excluding the other unnamed acquisition revealed on Thursday.
Through execution of its strategy, Centrica expects to deliver sustainable adjusted operating cash flow growth of 3 to 5% per annum over the period from 2015 to 2020. That growth will be delivered through investing in its customer-facing strategy and in part through a GBP750.0 million per annum cost-efficiency programme, which is expected to be fully delivered by 2020.
Capital expenditure also remains under a close eye, as Centrica said any further acquisitions moving forward will be less than GBP100.0 million each, and said it has set itself an annual GBP1.00 billion budget for acquisitions in 2016 and 2017.
"The group expects to deliver a progressive dividend, linked to its confidence in sustainable adjusted operating cash flow growth," said Centrica.
Adjusted operating cashflow for the year is forecast to be "in excess" of GBP2.00 billion, Centrica said.
That amount of cashflow would still be down by around 11% from the GBP2.25 billion in cashflow generated in 2015, suggesting the company's dividend will fall again this year.
Centrica's dividend is linked to cashflow, and it slashed its full-year dividend last year by 11% to 12.0 pence from 13.5p despite reporting a 2.0% rise in operating cashflow between 2014 and 2015. That suggests Centrica's dividend could be cut again this year as the company is expecting operating cashflow actually to fall.
"The company would expect sources and uses of cash to remain balanced in 2016 even after these two acquisitions. However, the credit metrics required for the current strong investment grade credit ratings are under pressure," said Centrica.
The move away from exploration and production follows on from the 60% fall in adjusted operating profit from the division, Centrica Energy, in 2015 after prices and production both fell. Centrica is also paying more attention to its other units such as British Gas after the division lost customers last year and reported a 1.7% fall in operating profit last year.
By Joshua Warner; [email protected]; @JoshAlliance
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