Orsted: Ditches Two U.S. Offshore Wind Projects, Books Hefty Impairments; Fair Value Cut to DKK 540

We cut our fair value estimate for no-moat Orsted ORSTED by 10% to DKK 540 after it booked DKK 28 billion of impairments on its U.S. projects, the bulk of which was for the cancellation of Ocean Wind 1 and 2 in New Jersey. Orsted highlights that its capital structure is significantly challenged. This could imply a future rights issue that explains the bulk of the Nov. 1 share price fall in our view. We view shares as materially undervalued and the likelihood of a rights issue below 50%, but pending more clarity on measures to shore up its balance sheet, shares will not rebound.

Orsted’s DKK 28 billion impairments, or $4 billion, are well above the DKK 16 billion announced in late August. This is due to the firm’s decision to scrap the Ocean Wind 1 and 2 projects totaling 2.25 GW of capacity on additional delays because of suppliers, less tax credit monetization, and a recent hike in long-term U.S. interest rates. The cancellation of these projects drives DKK 20 billion of impairments. The firm will also book between DKK 8 billion and DKK 11 billion of provisions in the fourth quarter for contract cancellation fees related to ending the development of Ocean Wind 1. Stripping out the Ocean Wind projects and incorporating DKK 11 billion of pretax provisions shaves DKK 50 off our fair value estimate or 8%.

On a more positive note, the firm sanctioned the 0.7 GW Revolution Wind project off Rhode Island that it co-owns with Eversource. Orsted confirmed that the project should be completed in 2025. After the recent rejection of incremental subsidies for its Sunrise Wind project, Orsted could be able to rebid at future auctions. Last, a significant subsidy hike is needed for the Skipjack project to be sanctioned. We assume that both projects will be scrapped, driving a DKK 10 reduction in our fair value estimate.

Orsted confirmed its 2023 EBITDA guidance, excluding Ocean Wind 1 provisions, after strong third-quarter results that largely exceeded company-compiled consensus.