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(Reuters Breakingviews) – Strong winds are good for Orsted’s massive offshore renewable energy farms, but past storms are still haunting CEO Mads Nipper. On Thursday, more surprise impairments over a major U.S. project blew away upbeat second-quarter results and sent the $26 billion Danish group’s shares down 8%. More turbulence is ahead.
Orsted has become the epitome of the renewables industry’s growing pains. Building huge projects in the middle of the sea with turbines and other parts costs a lot and requires supplier contracts signed years ahead. But the recent bout of high inflation sent raw materials costs soaring, stretching the finances of Orsted’s suppliers. At the same time, the spike in interest rates reduced Orsted’s expected future revenues and increased its debt servicing costs. That’s why last year Nipper shocked investors with $4 billion in impairments and $1.4 billion in project cancellation fees, partly due to supply chain delays in the United States.
Until Thursday, Nipper’s plans to cut back spending and derisk its supply chains appeared to be working. Orsted’s shares have risen nearly 60% since their November low. But in this industry, making provisions and ordering backups for some parts is not enough.
This time, Nipper had to postpone a major U.S project, Revolution Wind, that was set to start operating in 2025. That was due to construction delays by a partner responsible for the onshore substation that connects the wind power to the grid.
A person familiar with the matter said the issue is soil contamination – a problem that only became clear when construction started – and the delay could last 12 months. The potential loss of future income led to 2.1 billion Danish crowns ($310 million) of impairments on the project, accounting for nearly 70% of total impairments in the first six months of the year.
This setback is smaller than previous ones, but investors are understandably jumpy and sold Orsted’s shares. Granted, inflation has fallen, and major central banks are cutting rates, reducing costs for Orsted and its suppliers.
But markets are reluctant to price in the future growth implied by Orsted’s pipeline of projects, even the more advanced ones. Bernstein analysts estimate that the company’s operating offshore wind assets alone would be worth 392 crowns a share, based on the cash flows they already bring in – where the shares are currently trading. To get the wind beneath his wings, Nipper has to first prove he can escape past storms.
Orsted reported earnings before interest, tax, depreciation and amortisation (EBITDA) and excluding new partnerships of 5.3 billion Danish crowns ($782 million) in the three months to June 30, a 59% rise from the same period a year ago, the renewable energy group said on Aug. 15. The results topped an average forecast of 4.4 billion Danish crowns in a poll of analysts provided by the company.
However, Orsted booked 3.2 billion Danish crowns in impairment losses in the first half of the year. Construction delays in a major U.S. offshore wind project accounted for 2.1 billion Danish crowns of those losses.
Orsted shares were down 7.6% to 390 Danish crowns as of 0805 GMT on Aug. 15.
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