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(Reuters Breakingviews) – Orsted has learned the hard way how strong economic tailwinds can go into reverse. Less than a year ago the world’s top offshore wind farm developer by power capacity was eyeing rapid growth in the United States, where President Joe Biden’s green subsidies were supercharging the industry. Then rapid interest rate hikes and its own operational missteps knocked the $23 billion group off-balance, forcing Chief Executive Mads Nipper to stomach $4 billion in impairments and $1.4 billion in project cancellation fees last year. Wednesday’s belt-tightening is the right move, but only the first step in a long road back to credibility.
Orsted’s decision to cut its 2030 power capacity target from 50 gigawatts (GW) to as little as 35 GW means significantly less capital spending. The company is also shedding up to 800 jobs and pausing dividends for three years through 2025. Investors, who have endured a 40% slump in their shares in less than a year, won’t much like the cut to their payouts. But the measures mean Orsted won’t need to resort to an equity raise to strengthen its balance sheet, and imply the group’s debt shouldn’t threaten its investment grade rating.
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Given Orsted only has 16 GW of installed capacity right now the company’s growth story hasn’t been entirely blown away, and it’s still anticipating returns up to 300 basis points above its cost of capital. Still, analysts at Bernstein estimate the new guidance means EBITDA will grow at a slower compounded annual pace of 8% from 2023 through 2030, compared to up to 14% previously. Worse, at 375 Danish crowns a share, investors are giving hardly any valuation credit for this growth, Bernstein reckons.
A lot of that is because Orsted’s goofs suggested it didn’t know what it was doing. Despite new pledges to improve contingency planning, and heightened scrutiny on suppliers, inflation protection and project timelines, it’s hard to be sure these credibility concerns will fade any time soon. After all, despite various senior executive departures, including Chairman Thomas Thune Andersen who resigned on Wednesday, Nipper remains in charge.
All that said, two things should help Orsted in 2024. Some players in its supply chain are recovering – turbine maker Vestas Wind Systems’ shares rose 6% on Wednesday on encouraging results. More importantly, there’s a strong inverse correlation between interest rates and green transition players’ stock prices. If this year’s anticipated rate cuts see Orsted’s share price surge, Nipper may find his life gets easier without him having to do much more.
Orsted on Feb. 7 lowered its target for power generation capacity by the end of the decade to 35-38 gigawatts (GW), from 50 GW previously set in 2023.
The Danish group also said it would reduce capital expenditure in the coming three years by 35 billion Danish crowns ($5 billion), pause dividends for 2023, 2024 and 2025 and sell assets worth around 115 billion crowns towards 2030.
Orsted will also reduce its workforce by 600 to 800 positions globally to reduce costs.
Orsted shares had fallen 1.6% to 379 Danish crowns as of 1014 GMT on Feb. 7.
Editing by George Hay and Streisand Neto
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