Having previously warned about an exceptionally difficult operational climate, Centrica’s interim results were expected to be bad. But even the most ardent pessimist may have been slightly taken aback by the detail in the energy giant’s H1 results this week.
Adjusted revenue was broadly flat at around £13.8 billion, but squeezed margins and other travails contributed towards a near halving of operational profit, taking in just £399 million in the first six months of the year compared to the £782 million it reported in H1 2018.
That performance meant that a cut to the dividend was inevitable. Centrica shareholders have had a difficult relationship with chief executive Iain Conn, so much so that investor conference calls have almost become a spectator sport. Given the company’s H1 performance, his position was ultimately untenable by the time he fronted journalists yesterday.
Conn took the reins at Centrica in January 2015, its shares standing at a relatively bullish 280p at the time. More than four years later and Centrica’s shares now stand at just 75p - a 22-year low - sending its market cap to about £4.37 billion. That’s a quite remarkable feat by any means.
But Centrica’s recent performance can perhaps only tell half of the story. Conn’s tenure has coincided with a time of unprecedented change in power markets, both generation and retail, with Centrica exposed at both ends of the market. When Conn took over British Gas enjoyed a 24% share of the UK energy retail market, the largest of the Big Six energy firms which held more than 90% of customer accounts. Fast forward four years and British Gas remains the largest energy supplier, but its share has shrunk to 19% and the Big Six now holds just 73% of the market.
Conn might well have been served best by quoting Bob Dylan yesterday morning, not that it would have gone any way to alleviating investor concerns.
In Conn’s defence, Centrica has been a changin’ itself. It will have gone unnoticed amidst the financial disarray, but yesterday the company also confirmed that it would be placing its oil and gas division up for sale, pivoting towards becoming a solely customer-facing entity.
It’s been preparing for this future for some time. Its Connected Home and Distributed Energy & Power divisions have provided some rare solace for Centrica, and it has undoubtedly been investing sizeable sums into growing its capabilities for the future.
Centrica Innovations has ploughed millions into investments that will enable the utility to better understand its customers of the present and future, establishing a clear vision of what’s required to crack the energy market conundrum that has proven so difficult for so many. Conn’s summation yesterday that just two energy suppliers in a UK market that numbers 60 are “making money” is testament to those problems being market-wide, rather than just isolated examples.
And you only need to look as far as Cornwall to see that the company also has at least one eye on what the supply market of the future could well look like, with Centrica playing a central role in connecting businesses and homeowners with local, clean generation. The launch of an electric vehicle services division, while perhaps a little belated, also only stands to grow and grow aggressively considering that market’s potential.
In truth, Centrica is not the only energy company to have fallen foul of the trends of recent years. The Big Six’s market share slide has not arrested, leading many to draw the conclusion that the margin game in power has only a limited time left. In the years to come, investors and stakeholders may look back at Conn’s tenure and conclude he didn’t move the business forward fast enough.
And so, Centrica’s search for a successor begins in earnest. Conn is sticking around until next year to ensure a strong and stable transition, but the company faces a critical decision in who it hands the reins over to. Shareholders may expect a proven leader with energy industry experience, one to steady the ship before the waters get any choppier.
But an outside hire could well end up being an inspired choice. The sector’s transition is only going to gather pace and while Centrica has indeed laid the foundations for an adequately prepared business, enduring periods of intense change should be considerably high up any necessary skillset for Conn’s successor.
Comparing the clean energy transition with the significant change the telecoms sector has faced is now a worn trope, but bringing in a proven leader from that kind of industry could be a compelling proposition for a company whose future very much hinges on delivering a more comprehensive and digitally-enhanced service to a more savvy and demanding customer.
Ultimately, that’s a question for Centrica’s board and the numerous headhunters and recruiters falling over themselves to fill that void. Centrica’s choice will be an intriguing one, and a hire that could be more telling of the market’s direction than of the company’s previous four years.