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Ørsted’s C-suite must be feeling the chill. The Danish renewable energy developer is badly exposed to icy blasts blowing through its industry. The credibility of management is also blowing in the wind.
The gale-force gust came with Ørsted’s admission that it will exit two US projects amid $4bn of writedowns. The stock has fallen almost 60 per cent in the year to date.
To be fair, not all of Ørsted’s problems are of its own making. The wind industry has been caught in a squall of rising interest rates, supply chain snarl-ups and cost inflation. That matters to developers such as Ørsted because they typically bid to provide power at a fixed price and then lock down their costs later.
In the US, the time lag between locking down revenues and costs has been particularly severe because it has taken years to get permits authorised.
Companies need permits before they take a final investment decision and award contracts. Local authorities have been loath to renegotiate power purchase agreements. Cue a spate of US-related writedowns, including $300mn at Equinor and $540mn at BP.
Yet even in the midst of such turbulence, Ørsted’s announcement on Wednesday ruffled investors’ feathers. This is the third time the company has updated the market on its US prospects since June. Each time, its assessment has worsened.
Another troubling question is this: is why has Ørsted spent $4bn on projects on which it had yet to take a final decision? Traditionally, that is when companies, having quantified future revenues and costs, really start to invest.
Ørsted probably wanted to get ahead of the game, especially in an environment where costs were rising. Plate steel, estimates Barclays, costs 50 per cent more than it did in 2019-2020. Yet the gamble backfired and money has been wasted.
Despite strong results in its underlying business, Ørsted may struggle to get the wind back into its sails. The company says funds from operations have fallen to 21 per cent of net debt, below its long-term target of 25 per cent.
Annual accounts show revenues rising steadily but operating profits and cashflow staying broadly flat. That is a danger signal.
Raising equity is likely to be a last resort at current, depressed, valuations. Asset disposals are more likely. That would limit scope for growth. Investors need to take a long, hard look at the performance of senior management.
The Lex team is interested in hearing more from readers. Please tell us what you think of the offshore wind debacle in the comments section below
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