Orsted’s (ORSTED.CO) rotten year just went from bad to worse. Barely seven months after it shaved $365 million off the value of its U.S. offshore wind projects, Denmark’s $27 billion renewable energy giant late on Tuesday flagged a much bigger $2.4 billion hit to the same region’s schemes. For Chief Executive Mads Nipper, it’s far more than a little local difficulty.
As impairments go, Orsted’s latest is a humdinger. There are 5 billion Danish crowns ($730 million) of pain caused by supplier delays at the Ocean Wind 1, Sunrise Wind and Revolution Wind schemes on the Eastern seaboard, another 6 billion crowns relating to less generous than expected subsidies from the U.S. Inflation Reduction Act, and 5 billion crowns from the impact of higher interest rates on the value of its schemes overall. The 16 billion crown ($2.3 billion) overall hit is over half the book value of Orsted’s U.S. operations.
Nipper may be able to write back some of the above if rates and subsidy wrangling go his way again. And he’s sticking with assumptions that Orsted’s projects can generate returns of up to 300 basis points over their costs of capital. But the $7 billion hit to Orsted’s market value on Wednesday suggests investors don’t see this as a United States-specific headache.
One problem is pretty obvious: management credibility. Given wind turbine manufacturers like Vestas (VWS.CO) and Siemens Gamesa have had to hike turbine costs by over 30%, Orsted’s struggles with costs and delays are common across the wind sector. But at its June Capital Markets Day and again at a quarterly earnings update in early August, Nipper seemed pleased with the U.S. subsidy situation and downplayed the scope for nasty surprises from inflation and supply chain issues.
The credibility discount is all the more important given that the UK, where Orsted derived over 40% of its revenue in 2022, may also soon require a rethink. Sweden’s Vattenfall last month retreated from a major North Sea wind project, citing soaring costs. Given Orsted’s Hornsea Three wind farm has the same level of subsidised electricity prices as Vattenfall’s, it wouldn’t be a huge surprise if Orsted had to do a writedown there too.
Back in 2021, when Orsted’s valuation per share and market capitalisation respectively exceeded 1,300 crowns and $80 billion, investors priced in cash flows from projects Orsted hadn’t even won yet. At its current 435 crowns a share, the implication is they may not think Nipper can even deliver what he already has.
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CONTEXT NEWS
Orsted, the world’s largest offshore wind farm developer, said in a statement late on Aug. 29 that supplier delays might mean it would have to write down the value of its Ocean Wind 1, Sunrise Wind and Revolution Wind projects in the United States by up to 5 billion Danish crowns ($730 million).
As part of the review, Orsted also said the company’s discussions with “senior federal stakeholders” on obtaining more U.S. tax credits for its offshore wind projects had not progressed as expected, which in turn could lead to impairments of another 6 billion Danish crowns.
On top of this, the increase in long-dated interest rates in the United States affected both offshore as well as some onshore wind projects and will cause impairments of around 5 billion crowns, Orsted added.
Orsted’s share price fell 20% to 444 Danish crowns as of 1038 GMT on Aug. 30.
