Orsted Earnings: Maintains Guidance Despite Hit From Poor Thermal Generation Spreads; Shares Cheap

Narrow-moat Orsted ORSTED released first-half results below company-compiled consensus because of poor thermal generation spreads and high financial costs owing to a negative foreign-exchange impact. We confirm our DKK 780 fair value estimate. Shares appear materially undervalued. New Jersey recently passed legislation so that the 1.1-gigawatt Ocean Wind 1 wind farm can retain all federal tax credits. This paves the way for a financial investment decision on the project in the coming weeks, which would be a positive positive catalyst.

Second-quarter EBITDA decreased by 8% to DKK 3.3 billion, landing 14% below consensus. A key negative driver was the bioenergy business, which posted an EBITDA loss of DKK 0.6 billion in the second quarter versus DKK 0.65 billion profit last year. The business was hit by a sharp deterioration of spreads because of the fall in power prices and fuel procurement costs hedged last year at very high prices. Onshore’s EBITDA decreased by 26% as lower power prices and poor wind conditions more than offset a 15% increase in power output from new capacity.

Positively, offshore wind’s EBITDA jumped by 56% to DKK 3.1 billion in the second quarter, in line with the first quarter’s growth and 1% below the consensus. The business was boosted by the ramp-up of Greater Changhua 1&2a, higher achieved power prices thanks to inflation-indexed contracts for differences and renewables obligation certificates of U.K. farms, and the negative impact of overhedging in the year-ago quarter. Those headwinds more than offset poor wind conditions.

Orsted confirmed its 2023 EBITDA guidance, excluding new partnerships, of DKK 20 billion-DKK 23 billion as lower-than-expected earnings from bioenergy will be offset by higher offshore wind earnings. All in all, we should tweak downward our DKK 23.7 billion estimate, which will not have an impact on our long-term estimates or valuation.