Orsted: shareholders suffer from erratic cost control

Renewable energy promises a better future for the planet. But offshore wind specialist Orsted is currently being caught out by the volatility in the fossil fuelled power market. Its hedging policy has been ineffective while the costs of upcoming projects have picked up.

In a trading update the Danish wind farm operator announced preliminary full year 2022 results, and offered a lower than expected outlook for 2023 profits. Its share price fell 7 per cent on Friday morning, down over half from its peak of DKr1,351.

That should not surprise. Orsted receives a valuation premium for its secular growth potential. Yet cyclical commodity price volatility affects its short term profits. Orsted’s enterprise value-to-estimated ebitda, at roughly 11.5 times, is a fifth higher than London-listed utility SSE, which itself has sizeable renewable energy earnings.

Meanwhile costs, partly due to interest rates, are climbing in the US. Orsted’s DKr2.5bn ($375mn) impairment on its portion of New York offshore wind project Sunrise — it owns half — reflects surging installation costs. Though it won the auction to lead this 924 megawatt project in October 2019, permission to proceed comes much later. Construction begins next year. Power price agreements were probably agreed on lower cost assumptions. These might have risen by a quarter, thinks Jefferies.

One senses growing pains. Orsted has won six offshore wind projects on America’s East Coast, including Sunrise, since 2018. Questions must be asked as to whether the others — in New Jersey and Maryland — will also need impairments.

Plus, Orsted freely admits it has not hedged power volumes from its European wind projects properly. Managing its expansion — in Europe, the US and Asia — has taken a toll on the shares, which have gone nowhere since August 2019.

After pricing in a green future for Orsted, shareholders deserve more share price appreciation. That will not happen until Orsted gets a better handle on its project costs and its hedging programme.