Orsted: Mounting Issues for U.S. Offshore Wind Projects Drive More Impairments; Fair Value Cut 4%

Narrow-moat Orsted ORSTED announced potential massive impairments due to mounting woes for its U.S. offshore wind projects. This contradicts the message it has sent so far and therefore raises a confidence issue with management. We now assume that most of the U.S. projects will be value-destructive, driving a DKK 30 reduction in our fair value estimate to DKK 670. Shares appear materially undervalued but could remain dead money until U.S. projects are sanctioned.

In the third quarter, Orsted will book a DKK 5 billion impairment on the Ocean Wind 1, Sunrise Wind, and Revolution Wind projects because of cost overruns driven by supplier delays for the foundations. This issue wasn’t highlighted before. Talks with federal stakeholders about the eligibility of Ocean Wind 1 and Sunrise Wind for the 40% investment tax credit aren’t progressing as expected. If the projects only get the pre-Inflation Reduction Act’s 30% ITC, this will drive a DKK 6 billion impairment. This is disappointing as the group has so far said it was confident of getting the 40% ITC, deemed crucial for those projects to have a neutral net present value. Last, U.S. long-term interest rates increased by 50 basis points since the beginning of the third quarter. If they stay at this level, the group will book a DKK 5 billion impairment.

These upcoming impairments could total $2.3 billion, which is 58% of the $4 billion invested capital related to U.S. offshore wind projects. In the worst-case scenario, Orsted would scrap all the projects and lose all the money invested. This would drive a negative valuation impact of DKK 90 per share or 13% of our fair value estimate. We see the likelihood of this outcome below 50%, so we don’t factor it in. Instead, we now assume the Ocean Wind 1, Sunrise Wind, and Revolution Wind projects would be value-destructive with an internal rate of return of 5%, below our 6% WACC estimate, and the U.K. Hornsea 3 project will be value-neutral.