Orsted increasingly merits its investor blowback
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphic.
By George Hay
LONDON, Jan 20 (Reuters Breakingviews) -Orsted ORSTED.CO must be pining for 2021. Two years ago, the Danish wind power group’s market capitalisation exceeded 560 billion Danish crowns ($81 billion). After hurriedly disclosed 2022 numbers prompted a 6% share price drop on Friday, it’s now worth a lowly $38 billion.
In one sense, Orsted Chief Executive Mads Nipper is suffering from the same headaches encountered by other big renewable energy players, like Britain’s SSE SSE.L. Partly because of construction delays, his 19.6 billion Danish crowns of EBITDA from offshore wind operations in 2022 was way below analysts’ expectations, not least because he had to buy replacement power at a high price to honour pre-existing contracts. Most power companies are also getting hit by the same cost inflation and rising cost of debt that necessitated a 2.5 billion Danish crown ($364 million) writedown of Orsted’s Sunrise Wind project in the United States.
Nipper has two unique problems, though. Offshore wind contributes two-thirds of Orsted’s EBITDA, which means it can’t easily dodge problems in that area. SSE, on the other hand, has a gas storage and generation business which has helped it roll with the punches. That’s why the British group upped its annual earnings forecast on Friday, while Orsted disappointed investors.
The other headache for Nipper is his company’s waning status as the wind power industry champion. Two years ago, that meant investors gave the group credit for the value of wind projects Orsted had yet to win. In some analysts’ models, these hypothetical contracts accounted for around 50% of the total enterprise value. In JPMorgan’s latest valuation, however, unsecured future projects only supplied around a fifth of the 398 billion Danish crown target valuation.
Friday’s share price dip implies even that figure may be optimistic. Part of Orsted’s growth is based on its ability to fund future developments by selling down up to 50% of projects to outside investors. Tighter central bank monetary policy raises the discount rates used to value the schemes, meaning these so-called farm-downs could raise less money. If Orsted keeps on struggling operationally as well, investors may question whether it merits a growth premium at all.
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CONTEXT NEWS
Shares in Danish energy company Orsted fell by more than 6% on Jan. 20 after it announced a writedown on a large U.S. offshore wind project and released an earnings forecast for 2023 that fell short of analysts’ estimates.
Late on Jan. 19, the world’s biggest offshore wind farm developer announced a 2.5 billion Danish crown ($366 million) writedown on its Sunrise Wind project off the coast of New York, citing changes to its earnings projections.
Earnings at the prices it had agreed will be squeezed by the significant inflationary pressures and higher interest rates. The project is due to become fully operational in 2025.
Orsted expects 2023 EBITDA, excluding new partnerships, of 20-23 billion crowns, short of the 24.2 billion crowns expected by analysts in a company-compiled consensus.
The company said its guidance assumes significantly higher earnings from its offshore business, while earnings from its onshore division are expected to remain at last year’s level.
Shares in Orsted were trading at 625 Danish crowns, down 6.2%, as of 1125 GMT.
Winds of changehttps://tmsnrt.rs/3XrykWh
Editing by Liam Proud and Oliver Taslic
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