Credit Suisse cuts targets for Drax, Centrica, and SSE

Lower energy prices and their impact on those for power meant the major UK power groups would need to carry out self-help measures, although the ability of Centrica and Drax to do so was underappreciated by markets, Credit Suisse said.

The Swiss bank lowered its power price estimates for the UK in 2016 and 2017 on the basis of new assumptions for the cost of thermal gas and crude oil, of 27-30p/therm gas and US$36-54/bbl, respectively.

As a consequence, Credit Suisse's power price forecasts for 2016 and 2017 were cut by between 12% and 13%, and by another 5% and 6% from 2018 onwards.

That led analysts to trim their target prices on shares of Centrica, Drax and SSE.

For Centrica, the company was seen as needing to cut its capital expenditures by an additional £200m and its operating expenditures by £100m.

"Supply margins are more robust with falling gas prices, and the upstream is not reflected in the shares," analysts wrote, as they lowered their target from 280p to 270p.

As for Drax, the coal power station can boost earnings through spot market running and not generating overnight, though analysts cut their target from 320p to 290p as they wait to see whether the EC will grant state aid approval for the Contract for Difference.

"Freight costs have fallen and spot biomass cargoes are economic, albeit this is opaque. We think EC state aid approval for the CfD is required before management will make the economics clearer."

Credit Suisse also lowered its target on SSE from 1,500p to 1,450p, explaining that lower energy prices would rob the company of any growth in terms of earnings per share and earnings before interest and taxes during the period running from 2013 to 2018.

As a result, the company would need to cut long-term capital expenditures from £1.65bn per year to £1.4bn or unveil another £1.0bn disposal plan absent that to finance growth.