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Research highlights stocks which will benefit from EU departure amid volatile sterling
Thursday 20 Oct 2016 Author: Steven Frazer

Households and businesses face rising energy bills this winter as wholesale gas prices reverse more than three years of steady declines.

This could result in headaches for both the big six suppliers and many smaller independents, for different reasons, yet create a unique opportunity for selected stock market-quoted operators, such as Good Energy (GOOD:AIM) and Telecom Plus (TEP).

Nat Gas NBP Day Ahead vs TEP

The wholesale price of energy has surged since early September, and this cost has been consistently passed on to customers by suppliers. Experts says that most of the rise stems from supply uncertainty in the wake of the EU referendum vote, volatility in the Middle East and storage shortfalls.

The UK starts what market watchers refer to as the ‘heating season,’ which runs from October and through to March, with less gas in long-term stockpiles than normal. An unexpected outage at the Rough gas storage facility on England’s east coast, the largest in the country, to test the integrity of its wells in June caused it to start the winter with 1.3bn cubic meters (46bn cubic feet) of gas, 54% down from last year.

A rebound in the price of oil and decline in the value of the pound has also lifted the cost of natural gas.

Raising tariffs mean the main big six energy suppliers, including British Gas owner Centrica (CNA) and SSE (SSE), will be able to narrow the gap that had opened between spot prices and hedging contracts put in place during the past couple of years at much higher prices. But such moves typically prove hugely unpopular with users and prompt outcry from consumer groups and popularity-seeking politicians.

That could spark a renewed bout of switching by consumers. This has proved a boon for small energy independents in the past. According to analysts at Macquarie Research, independents have grown their share of the UK consumer energy supply pie from less than 2% in 2012 to around 14% now. But with most of these operating limited or no hedging, they are most exposed to hikes to wholesale prices.

‘We believe that a few of these players might come under financial stress in coming months,’ Macquarie comments.

According to its estimates, Good Energy is among those running on negative operating margins at present, although the company’s clear business model of supplying 100% clean energy may count in its favour. Telecom Plus is arguably the best placed of all thanks to its 20-year fixed-term wholesale energy supply agreement with Npower that includes working capital buffers.

‘Telecom Plus is a must own company in a rising power price environment,’ conclude Macquarie’s analysts. (SF)

Rising energy prices is always a hot political potato. We agree that Telecom Plus’s model neatly places it to maximise new customer growth, cap churn and deliver shareholders returns.

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