Orsted: headwinds buffet renewables

By rights, renewable energy companies should have the wind behind them. Fossil fuels need to be phased out of the energy mix. Renewable power should take up the slack. Yet industry leader Orsted, whose wind business posted disappointing third-quarter results, has lost almost half of its value over the past two years, while MSCI’s world oil index has more than doubled.

Lex has enthused over renewable investment, but that has been a bad call in recent years. Unfortunately, renewables stocks came into the current cycle priced for breakneck growth. The long-term secular growth potential remains. But supply bottlenecks and rising interest rates raise questions about the speed at which this materialises. Plus increasing competition has capped profitability.

Supply chain snafus have not helped. Vessels required to install wind farms are running short. The cost of turbines is up 10 to 25 per cent according to Mediobanca Research. Also, growing one’s renewables footprint requires a lot of investment, just when interest rates are rising. Orsted’s net debt should rise from less than 2 times ebitda this year to 3.4 in 2025, on Bernstein estimates. Debt cost of 3.3 per cent this past period is up from 2.6 per cent in the second quarter.

Market disappointment with persistent bad news, including low wind speeds, has exerted its toll. Wind stocks have de-rated sharply. Orsted, on an enterprise value of 11 times ebitda, sits at roughly a third of its valuation peak of early 2021. At least it makes money. Vestas has swung into loss.

The good news is that industry tailwinds remain in place. The US government has backed renewable energy with this year’s Inflation Reduction Act. Europe will need to offer more of a push too if it really does want to replace Russian gas. Oil and gas companies, which face a strategic bind with bags of cash, may snap up players which get into trouble.

Unfortunately, until the reality of growth catches up with breezy hopes, wind power shares will continue to flounder.