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Centrica (CPYYY) and Bayerngas Create E&P JV for Europe

Centrica plc CPYYY, a utility company based in UK, recently announced a joint venture ("JV") with German energy company, Bayerngas Norge, which is operated primarily by its major shareholder Stadtwerke Muenchen GmbH, to create a new sustainable exploration and production (“E&P”) company.

Centrica will hold 69% of the newly formed company while the remaining 31% will be owned by Bayerngas Norge’s shareholders. The transaction – having an effective date of Jan 1, 2017 – is expected to be completed by the fourth quarter of 2017. The JV will provide the scope for further consolidation and joint ventures through an initial public offering within the next five years.

Financial Details

Although the E&P company will use the combined assets of Centrica and Bayerngas Norge, it will operate as a separate company and have its own board. The JV, which will remain on Centrica’s balance sheet, will create synergies of £100-£150 million due to lower costs and portfolio optimization. Along with its E&P business, Centrica will give around £340 million, post tax, to the JV, in a string of deferred payments between 2017 and 2022. Stadtwerke Muenchen will give 100% of the shares in Bayerngas Norge in exchange for a 31% stake in the JV. The JV is expected to invest £400-600 million of its post tax operating cash flow into the business while the remaining cash flow will be distributed among shareholders.


The JV will be designed to hold its own assets in Denmark, Netherlands, Norway and the UK, which shows its focus toward Europe. Approximately 67% of its assets will be producing gas. In the initial stages, the JV is expected to produce 50-55 million barrels of oil equivalent (MMBOE) per annum from 27 producing fields. It will own proved and probable reserves of 409 MMBOE and will receive one operated UK onshore terminal located at Barrow-in-Furness. Under the marketing and sales agreements of the JV, Centrica expects to procure and market all of its production.

Centrica’s View

The JV is in line with the company’s 2015 strategy of limiting its participation in E&P activities through creation of a separate E&P business. It will help Centrica to maintain its focus on its consumer-facing businesses and flexible peaking plants from large-scale central power generation. The company also sold its Canadian assets this year along with its Langage and South Humber Bank power plants to implement this strategy.

About Centrica

Headquartered in Windsor, United Kingdom, Centrica is a growing integrated energy company operating in the U.K., North America, and Europe. It secures and supplies gas and electricity to millions of homes and businesses and offers a distinctive range of home energy solutions and low-carbon products and services.

Price Performance

In the last three months, Centrica, belonging to the Zacks categorized Utility - Gas Distribution industry, has recorded 1.3% increase in its stock price, while the broader industry witnessed a decrease of 0.1%.

Zacks Rank and Stocks to Consider

Centrica presently has a Zacks Rank #2 (Buy).

Some top-ranked stocks in the oil and energy sector include Cheniere Energy, Inc. LNG, Crescent Point Energy Corporation CPG and Canadian Natural Resources Limited CNQ. All these companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cheniere Energy’s sales for 2017 are expected to increase 272.8% year over year. The company delivered an average positive earnings surprise of 14% in the last four quarters.

Crescent Point’s sales for the second quarter of 2017 are expected to increase 20.2% year over year. The partnership delivered an average positive earnings surprise of 354.9% in the last four quarters.

Canadian Natural Resources’ sales for 2017 are expected to increase 49.4% year over year. The company delivered a positive earnings surprise of 30.8% in the first quarter of 2017.

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