Renewables posterchild Ørsted will struggle to restore its battered reputation

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Falls from grace are especially painful for companies once celebrated as the gold standard.

Danish wind developer Ørsted should know. The market value of this darling of the renewables sector soared to more than $82bn in 2021. It was held up as a model for how a former oil and gas specialist could transform itself.

Ørsted’s worth has since withered, down to less than a third of that heady peak, after the company last year scrapped two US offshore wind projects and booked DKr28.4bn ($4bn) of impairments.

Chief executive Mads Nipper survived a recent overhaul of top executives. He has promised a recovery plan by early next month — one that needs to avoid a big equity raise if he wants to get investors back on side. That may prove the easy bit. Ørsted will still struggle to shake off a crisis of confidence in its ability to deliver projects.

Ørsted’s woes owe something to wider industry conditions: higher interest rates and commodity prices pummelled offshore wind developers last year. The company also suffered from long delays between winning power price contracts for its now cancelled US projects in 2019 and 2021 and securing necessary permits.

But the truth is that many of its troubles are of its own making. It invested heavily in contracting equipment and developing the schemes. It made overly-generous assumptions about tax credits. In October it looked downright incompetent when it booked impairments that were nearly double the DKr16bn estimate issued just three months earlier.    

Nipper needs funds to finance its projects and avoid a downgrade in Ørsted’s BBB+ investment grade credit rating. Rating agencies will focus on its funds from operations as a ratio of net debt. This fell to 20.9 per cent at the end of September. Avoiding a downgrade, and the higher financing costs that could leave it uncompetitive when bidding for projects, will require an improvement to 25 per cent.

Raising equity would be difficult — and controversial in Denmark — given the government’s 50.1 per cent stake. Nipper could trim growth targets and capital expenditure requirements. Instead, Ørsted on Wednesday said it had agreed to buy out its joint venture partner in another US wind project — an odd move for a company in a corner.

The group could cut its dividend, which cost DKr5.7bn last year, or sell off assets such as stakes in UK wind farms. A combination of these could raise DKr54-65bn, reckons Bernstein, enough to alleviate concerns over its balance sheet.

None of these options are appealing. Embarrassingly, growth targets were upgraded only seven months ago, a signal perhaps of the company’s sense of infallibility. Quick routes to restoring credibility will prove even tougher to find. Only consistent and trouble-free execution of projects over a long period will revive Ørsted’s tarnished reputation.

This article has been amended to correct the dates of Ørsted’s cancelled US projects and the value of its earlier estimated impairments

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