Broker tips: Centrica, Drax, iGas

Analysts at Jefferies upgraded Centrica and Drax on Monday to 'buy' from 'hold' as it pointed to strong free cash flow generation and resilient balance sheets in "attractive amidst turbulent markets".

"In this environment with rapidly rising rates and cost of debt, we see an increasing focus on free cash flow generation and balance sheet strength," it said. "Within our coverage, Drax and Centrica stand out, with healthy levels of dividend cover and capex headroom.

"Both companies are also relatively insulated from the effects of rising cost of debt, with negligible amounts of refinancing risk."

Jefferies expects the UK government to provide details on regulation (revenue cap or a windfall tax) in the coming weeks. The bank’s illustrative and conservative £70.0/MWh cap scenario indicates that limited power price upside is priced in, with increased visibility a possible de-risking catalyst.

"We also see both as important to UK supply security," said Jefferies, as it cut its price target on Drax to 600.0p from 800.0p but left its target on Centrica unchanged at 90.0p.

Citi lifted its price target on British Gas owner Centrica on Friday to 93.0p from 81.0p as it reiterated its 'buy' rating on the stock.

"In our view, Centrica shares already reflect a punitive power generation windfall tax in the form of a revenue cap and an extension of the tax on oil and gas," the bank said.

"What the shares do not reflect is the upside risk from optionality and growth potential offered by a very profitable rough storage asset, its core cash generative retail business and the prospect for earnings clarity once we have visibility on any government intervention."

Citi also said it reckons that a windfall tax would provide a much-needed clearing event for the shares.

"Furthermore, in a rising rate environment, we prefer companies with little debt and robust balance sheets, qualities which Centrica already possesses."

Analysts at Canaccord Genuity lowered their target price on exploration and production firm iGas Energy from 100.0p to 85.0p on Monday after the UK government reinstated its moratorium on shale gas fracking.

Canaccord Genuity said the PM's announcement in the Commons that the government had experienced a "change of heart" regarding fracking for shale gas, which was quickly followed by a written ministerial statement confirming the decision, had "extremely disappointed" the group.

"While the door to re-open the possibility of fracking is always open, at least notionally, it is clear that there is currently no political will to allow it. To all intents and purposes, UK shale gas is now off the agenda," said Canaccord.

The Canadian bank stated that next steps for iGas "appear to be very limited". However, iGas indicates that it reserves the right to pursue legal processes to recover losses incurred and the analysts highlighted that it was "clearly too soon" to know if or how, and with which other companies, that might be undertaken.

"The combination of very high UK and European gas prices, the possibility of a change of government approach as a result of the conservative party leadership election, and the government U-turns on the matter have resulted in a very volatile market response to iGas. The stock is now back at levels before the recent "shale-mania" took hold, and we believed then, and still do, that the stock was too heavily discounted relative to its peers," said the analysts.

"For now, we remove our small highly risked assessment of iGas' shale gas potential resource from our valuation (15.0p). As a result, we reduce our target price to 85.0p (from 100.0p) and we maintain our 'buy' rating."