Centrica Still Up in September, but Concerns Loom

Wholesale gas prices have surged due to recent concerns over liquified natural gas (LNG) from Australia, with British-owned Centrica receiving an additional boost from stellar results in the summer and adjustments to the energy price cap. But short-term gains diminished. What could derail the stock from rising further?

Bolstered Performance

Centrica's share price has trended higher this year due to rising electricity prices in the UK instigated by the war in Ukraine and recent changes in Ofgem's energy price cap. Ofgem's price cap will reduce from October, falling from £2047 to £1923, but it will allow energy suppliers to increase their profit margins by millions of pounds. The regulator estimates the increase will add an average of £10 to 29 million of consumer bills over the year. Meanwhile, the amount of consumers falling into debt increased by 36% this year, according to EDF Energy.

Disruptions connected to lower electricity output in France and rising fears of a shortage of LNG supplies from strikes at Australia's Chevron plants have contributed to recent moves as EU winter stocks experience a rapid drop. This suggests that the government's attempts to provide financial support for household energy bills and revitalise the household energy market have not panned out as expected. "Big Six" executives, comprising Centrica, EDF, Eon, Scottish Power, plus newbies Octopus and Ovo, have urged for further state support in addition to recent cost-relief measures offered by energy suppliers. EDF Energy plans to roll back standing charges for vulnerable customers this winter to help reduce the strain.

Challenges and Opportunities

Bord Gais, one of the largest energy providers in Ireland owed by Centrica, has announced a 15.5% price cut for electricity and gas in response to government pressure. This may have contributed to short-term declines over the past few sessions. The stock had one of the worst performances among blue-chip companies earlier in the week, prompting analysts to advise securing profits. Additionally, Morgan Stanley sees a solid operating environment for Centrica but few near-term catalysts for further growth. On Wednesday, Merrill Lynch downgraded Centrica as it believes there are better risk-reward opportunities elsewhere.

Octopus Energy recently purchased Shell's household energy supply businesses in the UK and Germany, becoming the second largest energy supplier in the UK behind Centrica. Financial details of the deal have not been disclosed, but it is expected to be completed in Q4, pending regulatory approval. Shell and Octopus also signed a memorandum of understanding to explore a potential international partnership for electric vehicle (EV) charging.

As part of the UK's transition away from gas power stations and towards a net zero power system, the country has recently decided to conduct a trial to explore the role of electric vehicles (EVs) in providing flexibility in the UK energy system to balance the electricity grid in real time. Octopus Energy's "Intelligent Octopus" tariff offers cheap and clean electricity for EV charging, saving customers money and making the energy system more efficient. While homegrown offshore wind across the UK has generated 14% of Britain's electricity this year, the UK is exploring bringing even more electricity to supply Britain's power needs, which may weigh on the UK's electricity providers at some point.

Wedge Improves Reversal Chances

The share price of Octopus Renewables points to a terminal wedge pattern down to 83.50. It needs to be validated past 103, and eventually 112, but short-term bullishness above 96 will also increase the chances of having a low in. If the short-term support of 89 gives way to bears, losing the local threshold might instigate additional declines towards 80 and beyond.

Source: SpreadEx / Octopus Renewables

Key Takeaways

Centrica's stock has risen due to surging wholesale gas prices, adding to stellar results and the energy price cap adjustments. However, potential challenges loom as Centrica faces short-term declines prompted by price cuts and analyst downgrades. Meanwhile, Octopus Energy's acquisition of Shell's household energy supply businesses and the exploration of an international partnership for EV charging add to the evolving energy landscape.