Will Centrica PLC surge higher than SSE PLC, Royal Mail PLC and National Grid plc after joint venture update?

Does Centrica PLC (LON:CNA) (CNA.L) have more investment potential than SSE PLC (LON:SSE) (SSE.L), Royal Mail PLC (LON:RMG) (RMG.L) and National Grid plc (LON:NG) (NG.L)?

Centrica PLC
Centrica PLC

Centrica PLC (LON:CNA) (CNA.L) has released an update today to say it has reached an agreement with Stadtwerke Munchen to combine Centrica’s European oil and gas exploration and production (E&P) business with that of Bayerngas Norge. This will create a newly incorporated joint venture and leading European E&P company.

Centrica will own 69% of the JV and Bayerngas Norge will own 31%. The deal is expected to close in Q4 2017, subject to regulatory approvals and competition conditions.

According to today’s update, the combination will create a strong and sustainable European E&P business by combining Centrica’s cash-generative and relatively short-term production profile with the development portfolio and on-stream producing assets of Bayerngas Norge.

There is expected to be £100-£150 million of NPV expected through synergies from cost savings and portfolio optimisation. There is also the potential for an IPO in the medium term, with scope to strengthen the entity through further consolidation and JVs.

The deal fits in with Centrica’s strategy to create a more focused and stronger E&P business which could contribute to improved resilience, while limiting its participation to E&P.

In the last month, the Centrica share price has risen 2%. That’s a better performance than other dividend shares such as SSE PLC (LON:SSE) (SSE.L), Royal Mail PLC (LON:RMG) (RMG.L) and National Grid plc (LON:NG) (NG.L). SSE is flat, Royal Mail has sunk 10% and National Grid is 8% lower than it was 1 month ago.

In my opinion, Centrica has investment appeal from an income perspective. I think the changes it is making to its business could lead to greater stability and more resilient income prospects. However, I think the company still faces political risk. Therefore, it’s a stock I’m optimistic about, but possibly less so than I was prior to the general election, with the chance of nationalisation now higher in my eyes.

About Robert Stephens 3395 Articles
Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email info@investomania.co.uk or use one of the other contact methods available on the 'Contact Us' page