Bord Gáis owner Centrica shares rise amid relief over UK windfall tax   

Shares rose as much as 4.9% to a three-year high on Friday, putting the shares on track for their best week since June 2020, with a gain of 17%

Analysts were relieved the windfall tax levy announced by chancellor of the exchequer Jeremy Hunt will be based only on revenue above £75 per megawatt-hour, a higher threshold than many had expected.

All UK utility stocks benefited from a higher-than-expected windfall tax threshold in the British budget statement, but Centrica, in particular, stood out.

The British Gas and Bord Gáis owner —which is also Citigroup’s favourite share in the industry — rose as much as 4.9% to a three-year high on Friday, putting the shares on track for their best week since June 2020, with a gain of 17%.

Analysts had mostly assumed Thursday’s fiscal announcement by chancellor of the exchequer Jeremy Hunt would include a windfall tax on utilities, and were relieved the levy will be based only on revenue above £75 per megawatt-hour, a higher threshold than many had expected. 

According to Sanford C Bernstein analyst Deepa Venkateswaran, the statement ended months of uncertainty for UK generators “with a very reasonable outcome”.

Centrica was most impacted by the announcement, with higher earnings from elevated power prices set to more than offset the windfall tax impact in 2024 and 2025, she said.

Other stocks that rallied included power firms Drax Group and Airtricity-owner SSE, which like Centrica extended gains to a fifth straight session.

Citi analyst Jenny Ping, who predicted such optimism earlier in October, raised price targets on all three companies. 

For Centrica, Ms Ping sees a combination of strong profits and cash generation, and an ongoing share buyback, fuelling a rerating of the stock. She raised medium-term earnings per share estimates by between 25% and 50% for 2022 to 2024.

JPMorgan Chase analyst Pavan Mahbubani said the UK windfall tax “blows uncertainty away”, providing a much-needed clearing event for a sector which has cheaper valuations than the wider market. 

He anticipates earnings upgrades as power companies still have significant leverage to higher power prices. Centrica trades at a 60% discount to the utility sector, based on forward price-to-earnings multiples, Mr Mahbubani said.

Away from the UK, Austrian state-controlled utility giant Verbund also soared after the government in Vienna announced a windfall tax on energy profits that was not as harsh as many analysts had expected. Credit Suisse Group's Wanda Serwinowska called the announcement positive. 

Cold snap

Meanwhile, wholesale gas prices ticked higher on Friday on expectations for an extended cold snap across the continent. 

The price of gas for delivery in January traded at €120.20 per megawatt hour, sharply down from elevated levels in July, but still about double the price at the start of the year. 

Global crude oil prices fell sharply, pressured by concern about weakening demand in China and further interest rate rises by the US Federal Reserve.

China, which sources say is looking to slow crude imports from some exporters, has seen a rise in Covid-19 cases, while hopes for the moderation of aggressive US rate hikes have been dented by remarks from some Fed officials this week.

"As things stand, bullish price drivers are in short supply," Stephen Brennock of oil broker PVM said. "Yet with the EU embargo on Russian crude less than three weeks away, oil prices could still end the year with a bang."

Brent crude fell 2% to $87.98 a barrel. Recession concerns have dominated this week even with the European Union's ban on Russian crude looming on December 5 and the Organisation of the Petroleum Exporting Countries and allies, together known as Opec+, tightening supply. 

• Bloomberg and Reuters