Broker tips: Centrica, BHP Billiton, Premier Oil

It noted the shares fell 20% in 2015 following a 20% drop the previous year.

The group is exposed to wholesale gas and oil prices and regulatory uncertainty in the UK retail energy market, the bank said.

It pointed out that the entire senior management team changed last year and Centrica’s new strategy is to focus on downstream, moving away from upstream, aiming deliver £750m of annual cost savings by 2020 as part of a target to grow cash flow by 3-5% per year from the 2015 base level.

The bank said there are still two main areas of uncertainty: how the outlook for oil/gas prices affects the upstream valuation, and how the margin assumptions impact the UK downstream valuation in the face of political and regulatory uncertainty.

As far as the utilities sector more broadly is concerned, it said company-specific events, EU policy and management action will likely be the key determinants of multiples and therefore valuation this year.

Premier Oil’s shares tumbled on Tuesday after Jefferies cut its rating on the stock to ‘hold’ from ‘buy’ and slashed the target price to 33p from 120p.

Jefferies said net debt is expected to rise to $2.65bn in full year 2016 and existing production assets are set to decline in 2017 amid a slump in oil prices. The brokerage said the company has “similar debt issues” to Tullow Oil so the full value for the Sea Lion project in the Falklands upside is “questionable”.

“The near-term outlook for the oil market is bleak as global over-supply continues,” said Jefferies analyst Mark Wilson.

“Balance sheet support for the Euro exploration and production (E&P) sector is the immediate concern combined with materiality of asset base in a new world order where production supply concerns are clearly reduced.”

Wilson said production growth has been a challenge for European E&Ps in recent years even at high oil prices yet the recent pick-up in output is the principal reason for the current weakness in prices.

“In the cycle to come, this historical operational reality will likely weigh on Euro E&P's, probably in the form of tighter access to capital (capital to flow where production can grow),” he said.

“E&P's with truly material commercial assets, a realistic view on monetisation & balance sheet strength have a place in such a world, but patience is required.”

HSBC downgraded BHP Billiton to ‘reduce’ from ‘hold’ and cut the price target to 590p from 1,100p saying the company faces further headwinds from oil and iron ore.

The bank said it assumes a 50% dividend cut and eliminates most non-essential capex, which leaves BHP around $2bn cash destructive post dividend over calendar year 2016.

“We think the Samarco incident fallout (we assume $3.5bn fines) will continue to weigh, limiting rationale for a ‘premium’ valuation,” said HSBC, noting that the stock screens as expensive and iron ore spot has significant downside risk.

HSBC said that while an equity issue could be a way to secure extra funds, the market is likely to be super critical of the asset quality and price tag.

More generally, the bank said it expects seasonal weakness in the first quarter to maintain pressure on commodities.

Base metals may stabilise towards mid-year with supply-side cuts and China policy action, it said.

It added that while weak producer currencies offer some support, continued renminbi weakening has negative commodity read-across.