It suffers from a greater reliance on offshore wind than its rivals, and is no longer treated as an industry champion
Orsted must be pining for 2021. Two years ago, the Danish wind group’s market capitalization exceeded 560 billion Danish crowns (75 billion euros). After the 2022 figures announced on Friday caused an 8.70% drop in the share price, its current value is just 39,000 million euros.
In a sense, Orsted’s CEO, Mads Nipper, suffers from the same headaches as other large renewable energy companies, such as Britain’s SSE. Partly due to construction delays, its EBITDA of 19.6 billion Danish kroner (2.6 billion euros) from offshore wind operations in 2022 fell well below analysts’ expectations, not least because it had to buy power from expensive replacement to fulfill pre-existing contracts.
Most energy companies are also being hit by the same cost inflation and rising cost of debt that forced a DKK 2.5 billion (€340 million) writedown of Orsted’s Sunrise Wind project across from the coast of New York (United States). The project is scheduled to be fully operational in 2025.
However, Nipper has two particular problems. Offshore wind contributes two-thirds of Orsted’s ebitda, meaning it cannot easily sidestep problems in that area. SSE, on the other hand, has a gas storage and generation business that has helped it weather the storm. For this reason, the British group raised its annual profit forecasts on Friday, while Orsted disappointed investors.
The other headache for Nipper is his company’s waning status as champion of the wind industry. Two years ago, that meant investors credited the group for the value of wind projects Orsted had yet to win. In some analysts’ models, these hypothetical contracts represented around 50% of the company’s total value. However, in the latest valuation from JP Morgan, future unsecured projects only contribute around a fifth of the target valuation of 398 billion Danish kroner (54 billion euros).
Friday’s share price decline implies that even that figure may be bullish. Part of Orsted’s growth is based on its ability to finance future developments by selling up to 50% of projects to outside investors, a formula called farm down. Tighter monetary policy by the central bank raises the discount rates used to value projects, which means that these farm downs they could raise less money.
Orsted forecasts 2023 ebitda, excluding new partnerships, of between 20 and 23 billion kroner (2.7-3.1 billion euros), below the 24.2 billion (3.3 billion) forecast by analysts in a consensus compiled by the company . It adds that its forecasts assume a significant increase in profits from its offshore business, while profits from its onshore division are expected to remain at last year’s level. But if Orsted continues to experience operational problems, investors may wonder if it deserves a growth premium.