DNNGY - Orsted

[lnofeisone]

Moving from another thread.

 

Anyone looked at Orsted (DNNGY)? It's an energy company in business of electricity (they divested their distribution assets and focus on energy worldwide). I may do a write-up on this if I get some time.

 

The play here is that they are very early to the green energy game. Wind is expected to get $1.4T in investment through 2040. Today, offshore wind is not really viable on cost per energy unit. It is substantially more expensive than nuclear, nat gas, oil, solar, or coal. Even if you take a management disaster of a Vogtle nuclear power plant which is 5 years behind schedule and $20B over budget, nuclear is still more cost-effective than offshore wind but unpopular (everywhere but china).

 

Some of the deals they have are pretty spectacular (for Orsted) and awful for the other side (e.g., Block Island Windfarm charging something like $200MWh where NE averages about $30MWh). NY Windfarms will hose the taxpayers (but not the ratepayers, as one brochure exclaims!). Their Index OREC pricing is a thing of beauty. Renewable energy is also getting heavy subsidies (12-30% credits for building, better financing, better depreciation rates) but these are being stepped down. I'd argue they are reasonably priced (maybe slightly to the richer side) there is definitely a runway to justify the valuations in the next few years (including entry into Japan).

[kab60]

I know the Company intimately. Project returns coming down is a very real risk. They've hit jackpot on some of their earliest projects, which are coming online these years (Hornsea in the UK is probably one of the best infrastructure investments ever), but those projects are a thing of the past. While projects used to get fixed feed-in-tariffs, today projects mostly compete in auctions where the lowest price wins. Some of the newest markets, like Taiwan, awarded tariffs to new projects via beauty contests (thus not only price) in their first round, but today it's all about price as well.

 

Ørsted has had a terrific run because the market has grown tremendously, rates have come down and there has been less competition than expected but recently Oil Majors have announced very significant plans to go after their lunch (BP now targets 50 GW of renewables in 2030 - Ørsted targets 30 GW. Repsol, Total, Shell, Equinor are also accelerating their plans). Ørsted has a clear lead, and thus new entrants will have a hard time to win projects unless they sacrifice returns. I've been wrong on the Company for a long time, because competition was slower to emerge than expected. But I think they have a much tougher time ahead of them in the coming years than in the last five years, and I suspect outgoing CEO Henrik Poulsen - which has done an impressive job - might want to get out at the top. Also, they've been boosted by ESG-investors.

 

Another way to play the booming offshore market indirectly would be via Equinor. They've been in offshore wind for a long time and their new CEO wants to focus increasingly on that part of the business. So hopefully they'll "do an Ørsted" and channel oil and gas income towards renewables, possibly spinning it off in the future, but that's a long term story and not appreciated by ESG-investors since it's still very much about O&G.

[lnofeisone]

This is helpful context. I'm working on seeing how their returns are stacking up on per project basis. I see a bit of a barbell strategy - nuclear on one side and solar/wind on the other - coming from countries (e.g., Poland).

 

What I am curious about is the fact that there are about 300GW worth of policy commitments for offshore wind and only 30GW have been installed to date. Even if Orsted as a leader gets 25% of these, we are looking at 75GW. So far, they are at 7GW.

[kab60]

They are quiet transparent on project returns, and they have come down. Last year they also lowered long term project IRRs. CMD next year and institional investors worried whether they will come down again. But even at lower levels they can create a lot of value with rates where they are and their low cost of capital.

 

Anecdotally pension funds etc buys these things down to 3 pct returns, when they come online, which is nuts, as bond substitutes. So Ørsted creates a ton of value developing these projects and deploying huge amounts of capital. Bull case is they can keep creating value at lower returns, because even with new entrants there might be enough for everyone. It requires discipline, and there are examples that some new actors have lowballed bids, Shell in the US for an example, but it's difficult to say. Also, offshore wind might become much bigger than most expect. In 5-10 years floating turbines will probably start to be deployed in gigawatt scale, and that market is at least 10 times larger than bottomfixed foundations which are used today as most large cities and thus power centers have too deep water for bottom fixed foundations which are used everywhere today.