Market Report: Investors dump Centrica amid oil price fears

Worries that Centrica profits could be hit by the ongoing oil price strength caused a rushing among investors to exit the electricity and gas distributor yesterday.

The problem that Centrica, down 3p to 231p, faces is that it is a net purchaser of wholesale gas and power and is seeing the price it pays for both rise because of the soaraway crude value.

The result is that the utility must either absorb these higher costs, and so accept lower profits, or try to pass them on to consumers and most probably see its market share fall. Centrica's attempt to pass on higher input costs to users last year triggered significant customers losses.

Morgan Stanley believes that to prevent this from happening again, Centrica has decided to manage input cost increases so they have a minimum impact on its market share. Assuming these do not rise further, the US broker fears the new oil price scenario could reduce the group's average earnings between 2006 and 2008 by up to 21 per cent.

But not all in the utility sector will be negatively impacted by the strong price of crude. Vertically integrated players such asScottishPower, up 5.75p to 487p, and Scottish & Southern Energy, up 10.5p to 994.5p, are largely immune while British Energy, 9.5p stronger to 409.5p, is likely to be a major winner from rising power prices. Morgan Stanley calculates that the current energy price outlook could boost the electricity generator's earnings by as much as 60 per cent as long as the company plays its cards right.

Big oil stocks had yet another great session. Shell rose 17p to 545p, BP put on 11p to 595p and BG, the best performer, added 18.25p to 472p. Some analysts were heard arguing that the industry could be facing another round of consolidation similar in scale to that seen during1999 to 2001. Should that happen, BG, because of its relatively small size, will bevulnerable to a takeover.

O2 rose 2.75p to 129p as Patrick Lupo, a director of the mobile phone operator, bought 50,000 shares at 128p. Possibly holding the stock back from further gains was news that the Dutch telecoms group KPN had bought Telfort, a local mobile phone player, for a little less than €1bn (£664m). Analysts see this development as making a fresh bid for O2 by KPN less likely. In 2004, the Dutch group held offer talks with O2 that came to nothing.

The wider FTSE 100 roared 46 points higher to 5,090, while the FTSE 250 put on 44 to 7,310 as Wall Street stocks gained significant ground in early trading. Intertek gave up 24.5p to 700.5p after the company warned that its first-half profits would be negatively impacted by the weakness of the dollar against sterling.

As a result of the statement Cazenove downgraded its rating on Intertek to "underperform" from "neutral" and cut back its earnings forecasts.

Isoft dropped 15.5p to 417.5p after Patrick Cryne, the chairman of the IT solutions group, sold 3.5 million shares at 425p, netting him slightly less than £15m. Meanwhile, Steve Graham, the group's commercial director, sold a more modest 2 million shares at the same price. Capita fell 0.5p to 371.75p as Dresdner Kleinwort Wasserstein cut back its rating on the support services group to "hold" from "add" after a meeting with the company.

Xansa rose 2.75p to 92.25p as Investec Securities urged investors to pile into the stock beforethe company's full-year results tomorrow. The broker said; "While the recent trading update confirmed that results for the full year will be in line with expectations, we upgrade our recommendation from hold to buy in anticipation of a positive outlook statement for the forthcoming year from Xansa."

Investec is particularly upbeat about the prospects for the group's offshoring operations in India, which are a fast-growing part of the business and have the potential to produce significant profitability.

Kingston Communications rallied 1.25p to 63p. After last week's sale by UBS of Kohlberg Kravis Roberts' 22 per cent stake in the telecoms carrier, there have been persistent rumours that the Swiss broker got stuck with some of the private equity firm's stock on its books. Hence, Kingston shares dropped well below the 65p placing price in response to the sale. However, brokers believe yesterday's rally shows that even if this had been the case the overhang should havecleared.

Among smaller companies, Volex put on 6p to 94p after boast of a 73 per cent take-up rate for its £19m rights issue. White Nile put on 4.5p to 119p as the south Sudan-focused oil explorer announced a £7m share placing priced at 100p. Existing institutional investors and newcomers supported the fund raising, the company said.