Engie Shifts Gear on Asset Sales, Cost Cuts as Shares Fall

  • Kocher says divestment plan will progress ahead of schedule
  • CEO seeks to enter growth phase as quickly as possible

Engie SA expects to complete its 15 billion-euro ($16 billion) divestment plan ahead of its end-2018 deadline, and may increase cost cuts as the French utility seeks to rekindle growth dented by falling gas and power prices, Chief Executive Officer Isabelle Kocher said.

“My goal is to complete it well before, but I want to keep a margin to make the most of these divestments,” Kocher, the only female CEO of a CAC 40 company, said Friday in an interview in Paris. “We’ve decided to sell assets well and quickly to capture as much value as possible, to put this transition phase behind us as quickly as possible, and to enter a growth phase as quickly as possible.”

Isabelle Kocher

Photographer: Christophe Morin/Bloomberg

Engie’s shares hit a record low on Nov. 18, a week after it said 2016 earnings will be at the low end of its forecast range, citing falling natural gas prices prices. The stock, which rose as much as 1.1 percent in Paris Monday, has dropped 29 percent this year, the worst performer on Europe’s STOXX 600 Utilities Index, suggesting that investors remain wary of the company’s transformation plan outlined in February.

The plan included asset cuts to reduce exposure to oil, gas and power prices that have tumbled amid oversupply and government subsidies for clean energy. The company will reinvest the 15 billion euros it expects to raise to expand mostly in energy services, renewable power and gas pipelines, where revenue is regulated or more predictable. Combined with 7 billion euros of maintenance spending, this will add as much as 1.1 billion euros to earnings by 2018, partly offsetting lost profit from assets sold, Engie said in June.

Three Strengths

“The key source of uncertainty for future earnings is when the new business organization will start driving the top line,” Credit Suisse analyst Vincent Gilles wrote in a Nov. 10 note, following Engie’s publication of third-quarter sales.“We still believe that earnings growth will be subdued until the end of the decade.”

Kocher is confident the plan will pay off as the company is pouring money into activities it knows well.

“We’re investing in our three strengths: renewable energies, gas-fired generation and gas infrastructures, and decentralized energy solutions, mostly through organic investments, so it takes time, but it’s the best way to create value,” said Kocher, who was appointed CEO of the former French gas monopoly in May. “I’m not making a leap in the dark.”

The company was turned into a global energy group by her predecessor Gerard Mestrallet, who remains chairman. Kocher dismissed speculation she doesn’t have Mestrallet’s backing.

Mestrallet Backing

“I run this company; Gerard founded the group,” she said. “His presence on the board and his support for this major transformation plan is very important.”

As with any transition, the early months are the most difficult, Kocher said.

“The momentum on the transformation plan is good, but this initial, starting phase is probably the most thankless one, since earnings growth is not yet visible given dilution from disposals and continued pressure from commodity prices,” said Kocher.

The timing of Engie’s earnings trough will depend on the pace of asset sales, the CEO said. The company, which is selling or closing all coal assets, has already signed 6.1 billion euros of divestment in the first nine months of the year. It’s working on the sale of its oil and gas exploration and production assets as well as its Polish power plants.

Finding Buyers

Engie may sell its assets in Poland “in coming months” as “we’ve managed to draw very good potential buyers,” Kocher said. She also expressed confidence in a potential sale of Engie E&P, while declining to provide details.

“The ongoing transformation plan could pave the way for a significant re-rating of the stock with the E&P disposal remaining the main short-term catalyst,” Pierre-Antoine Chazal, an analyst at Bryan, Garnier & Co, wrote Monday in a research note.

Engie, based in Courbevoie, outside Paris, is also considering merging its gas terminal unit Elengy with GRTgaz, the French gas transmission business that it partly owns, as a way to boost savings and provide more solutions to customers, Kocher said.

To help reduce debt while providing clarity for investors, Engie will also reduce its dividend to 70 euro-cents per share for the 2017 and 2018 financial years, down from 1 euro for this year, Kocher said in February.

“We have committed ourselves to a clear dividend policy up to 2018 and, depending on the progress made on the transformation plan, in particular the pace of disposals, we could consider returning more to shareholders,” Kocher said Friday.‎

The company, which is 33 percent owned by the French state, has also cut 400 million euros of costs in the first nine months of the year as part of a plan to save 1 billion euros by the end of 2018.

“If we can achieve more than targeted, I can assure you that we’ll do it,” Kocher said. “We have considerable room of maneuver” thanks to digitalization, she said. “We’re raising the bar on procurement savings,” and “we just started works to see if we can go further on cuts in corporate costs.”

‘Tectonic Shift’

Kocher said she has the backing of the board, which recently “reaffirmed the strategy and outlined that we’re ahead of schedule on all milestones of the road map.”  

She sees the company riding the emerging trends in the industry even after U.S. President-elect Donald Trump’s pronouncements on the use of coal and his questioning of climate change.

“Even if the transformation is challenging, we’re positioned like no-one in this trend in any case, because it’s led by consumers, energy users, local governments, and less and less by states,” Kocher said. “It’s a tectonic shift.”

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