Update - Orsted A/S
Source: The Bloomberg
On August 29, 2023, Orsted announced “anticipated impairments on its US portfolio” of offshore renewable assets, relating to supply chain issues, high interest rates, and an inability to secure federal tax-credits. In the three weeks since the announcement, Orsted lost roughly a fifth of its market value, leading to widespread uncertainty about the company’s credit rating and its future conducting business in the United States. Below are excerpts from Orsted’s press release about the “impairments.”
The Ocean Wind 1, Sunrise Wind, and Revolution Wind projects are adversely impacted by a handful of supplier delays. Ørsted has concluded that there is a continuously increasing risk in these suppliers’ ability to deliver on their commitments and contracted schedules. This could create knock-on effects requiring future remobilizations to finish installation, as well as potentially delayed revenue, extra costs, and other business case implications. These impacts will lead to impairments of up to DKK 5 billion, assuming no further adverse developments in the supply chains on these projects.
In addition, our continued discussions with senior federal stakeholders about additional ITC qualifications for Ocean Wind 1 and Sunrise Wind are not progressing as we previously expected. We continue to engage in discussions with federal stakeholders to qualify for additional tax credits beyond 30%. If these efforts prove unsuccessful, it could lead to impairments of up to DKK 6 billion. The level of a possible impairment will be decided based on a probability weighted assessment of the likelihood of obtaining the additional ITCs.
Furthermore, the US long-dated interest rates have increased, which affect our US offshore projects and certain onshore projects. If the interest rates remain at the current level by the end of third quarter, it will cause impairments of approximately DKK 5 billion.
The impairments relating to Ocean Wind 1, Sunrise Wind, Revolution Wind, South Fork Wind, Block Island Wind Farm, and several US onshore projects will be recognised in our interim report for the first nine months of 2023.
In response to this news, Beskar has decided to revise its valuation of Orsted, cutting our original valuation of Kr544.42 to Kr432.20, or about 21%. We cut the growth rate assumptions for both offshore and onshore wind segments to 4.0% each, down from 10.0% and 9.0%, respectively. Additionally, we have increased the discount rate used in our net present value calculations by 200 basis points to 10.0% from 8.0%. The weighting for our conservative market assumption and optimistic market assumption for the P2X business has also shifted, with the conservative market assumption increasing to an 80% weighting from 70%, and the optimistic assumption being lowered to 20% from 30%. Lastly, we have updated our reporting to last twelve months for segment EBITDAs as well as balance sheet information for total assets and liabilities. Our margin of safety remains at 45% as we believe this is still an acceptable safety net considering the additional conservative assumptions added to the above areas.
While the news of Orsted does hurt its business in the short-term, we remain confident in the position Orsted will play in helping to decarbonize the world in the long-term. We are also still optimistic in Orsted’s P2X division and its role in decarbonizing difficult industries.
As a result of the sell-off that occurred due to the impairments, Beskar began acquiring shares in Orsted using the listed American Depository Receipt (ADRs) DNNGY, and we expect to be long-term investors. Beskar acquired shares at a significant discount to our original valuation and around our current target price.