In a recent trading update, the company stated that it had made good progress since July and that its full year earnings are likely to be in line with expectations. More broadly, though, the business has been struggling under a challenging environment of weak commodity prices, political pressure to reduce household bills and low margins on power generation. Indeed, weak oil prices have been particularly problematic as Centrica operates an integrated business model whereby it owns significant oil and gas assets in the North Sea that guarantee its downstream gas supply. Whilst this is a stable long term strategy it has been painful in the short term as falling oil prices have necessitated significant write-downs in respect of the value of these upstream assets.
In response to these challenges, management published a strategic review in July this year that proposed some changes to various parts of the business. The review focuses on achieving capital and operating efficiency via measures such as headcount reduction and lower spending on both power generation and upstream exploration and production.
Looking forward, market conditions look set to remain challenging in the short term. Set against this, expectations are modest and management are confident that the planned savings from the strategic review will help the business generate more than enough cash to cover the attractive 5.7% dividend yield. The full year 2015 results are expected in February 2016.
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