The heat is on for energy firms as high prices send profits soaring | Energy industry

Hapless bloke in cream woolly jumper and 1980s moustache dashes out of the village pub, knocks over a postman on a bicycle, and enthusiastically endorses British Gas shares. This much-remembered scene came from the 1986 Tell Sid TV advertising campaign, which encouraged the public to buy into the energy supplier’s privatisation, and its echoes will reverberate this week.

British Gas owner Centrica will on 28 July announce its results for the first half of the year. It’s a critical day in the energy industry, with oil behemoth shell revealing its second-quarter numbers, and National Grid planning to publish its initial outlook for winter electricity supplies.

Centrica’s crunch dividend decision could take center stage. For the 500,000 or so remaining small investors who bought in at the time of the Tell Sid campaign, the company has built a reputation as a reliable dividend payer.

However, the payout has become less dependable in recent years. In 2019, former boss Iain Conn cut the dividend after the introduction of the energy price cap, and in 2020 the divi was suspended to preserve cash in the early stages of the pandemic. Then, in February, the firm announced soaring profits, paid back £27m in furlough funds and new boss Chris O’Shea waived his £1.1m bonus while indicating that the dividend was on its way back.

But rising bills and a cost of living crisis mean paying out cash to shareholders risks a public blacklash.

City analysts appear confident that the payout will now return at some level. Deepa Venkateswaran, senior analyst at AllianceBernstein, predicts that the company will offer a “modest” dividend of around 3p a share this year, worth about £175m.

She said: “Paying a dividend now is much less controversial than it would have been, as the company is now in a much better financial position.

“The furlough money has been repaid, Centrica has not complained about the windfall tax [on oil and gas firms] And it is not profiteering on bills: the price of gas is just high. It won’t be an eye-watering dividend, and feels justified.”

Investec analyst Martin Young simply remarked: “If not now, when?”

A boom in gas prices is expected to have pushed higher profits and the company has slashed jobs and spending during the pandemic. Operating profits are expected to reach about £1.3bn, up from £262m in the same period last year.

Beyond the dividend deliberations, O’Shea may give an indication of how tough a winter the company expects consumers to have. Any provisions for bad debts, from customers unable to pay their bills, will be closely watched.

Centrica’s British Gas subsidiary will hope to hang on to the 700,000 customers it has taken on from failed suppliers since the start of the energy crisis. Investors will also be keen to see any sign of progress in negotiations with the government over the reopening of its Rough gas storage site in the North Sea.

Shell’s update is likely to underscore the reasons for the energy profits levy the government imposed on North Sea oil and gas operators in May. The company notched up its best quarterly profits in a decade, at $9.1bn in the first quarter, and analysts at HSBC believe earnings could nudge $12bn.

Onlookers will be watching closely for any comments on investments in the UK – in light of the windfall tax – as well as the outlook for the gas market given the supply shortage in Europe. Chief executive Ben van Beurden may also decide to weigh in the debate over high petrol prices, after the competition watchdog concerns raised over refining margins.

National Grid’s update will be designed to help the electricity industry prepare for the winter. It is expected to set out any likely supply issues and forecast probable margins ahead of a more in-depth assessment in the autumn. However, any predictions may be rapidly generald if Russia chooses to cut off gas supplies.

Britain may be basking in the sun, but the clouds are already forming on the energy industry’s horizon.

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