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Green transformation meltdown continues with shocking Orsted Q3 earnings
Peter Garnry
Chief Investment Strategist
Summary: October was another bad month for our various green transformation theme baskets as weak outlooks in Q3 earnings results from green companies have weighed on the industry. Orsted symbolizes the meltdown in the green transformation with its stock down 78% from the peak and taking another big hit today on worse-than-expected write-downs related to its US offshore wind power projects.
Key points in this equity note:
- Our various green transformation equity baskets had another bad month in October extending an already horrible year for green transformation stocks.
- Nuclear is increasingly a bright light in the green transformation highlighted by Cameco in their Q3 earnings result.
- Orsted’s shocking Q3 earnings result today with new additional write-downs have symbolized the troubles in the wind power industry and the wider green transformation. Medium-term the problem is if the write-downs begin to impact the credit rating.
Green transformation baskets extend horrible year-to-date performance
October was another bad month for our three green transformation theme baskets (renewable energy, energy storage, and green transformation) extending this year’s losses to between -27% and -32%. As we have written in many equity notes this year, the green transformation is a capital and commodity intensive transformation and thus this part of the market has been hit hard by rising bond yields and higher commodity prices. In addition, the excessive equity valuations in everything related to the green transformation in 2021 have also added to the current hangover experienced in this segment of the equity market.
The drivers of bad performance across these theme baskets have been worse-than-expected outlooks with Tesla CEO Elon Musk’s downbeat comments on the Q3 earnings call standing out in October as a dire example. On price performance, the iShares Global Clean Energy UCITS ETF is now trading at the 2020 levels highlighting that the late 2020 and early 2021 price performance in green transformation stocks was clearly a bubble built on unrealistic expectations for the future.
Another clear trend that has emerged in the green transformation is that nuclear power is increasingly becoming a bigger part of the solution to decarbonizing the economy with Cameco’s Q3 results and comments yesterday confirming. The demand outlook for nuclear power is increasing quarter by quarter.
Finally, it is worth noting that the only theme basket that was up for the month of October was the defence basket driven by a ‘war premium’ instead of the assumed ‘oil premium’ as a fallout from Israel’s war with Hamas. The defence basket is increasingly going to be a speculative upside bet on the US election in the case the Republican party wins the election because it might lead to less US involvement in Ukraine. This would set off the alarm bells in Brussels and likely ignite a frantic acceleration of weapons demand and production in Europe catapulting European defence stocks even higher than the already elevated levels since the war in Ukraine began.
Orsted shocks the market with more write-downs and dangers lurking in the capital structure
No other company like Orsted has symbolized the fall from the green heaven. The stock is down 78% from its peak and is now trading around 2017 levels. The company recently announced big write-downs related to its offshore wind business and today in its Q3 earnings results the company has increased the write-downs to around $4bn driven by supply chain issues (commodity prices and longer delivery times on key US offshore wind projects such as the important Ocean Wind 1 wind farm). Investors are in shock and the management’s lack of transparency in how various variables impact projects has destroyed the trust in the company.
Orsted has stated that it will terminate the development of Ocean Wind 1 and Ocean Wind 2 setting aside DKK 8-11bn in provisions related to cancellation fees to the US state of New Jersey. Phil Murphy, Governor of New Jersey, has released a statement today saying that the state will proceed with legal action to get Orsted to finish what it has committed to deliver to the New Jersey state.
Longer term, the second chart presented by Orsted in their investor presentation is more serious, because the FFO (funds from operation) has declined to just 21% of adjusted net debt which is below the long-term commitment. This could impact the credit rating and thus the funding rate that Orsted can fund itself at in bond markets. Why is this important? Because many of these renewable energy projects are financed with debt and thus the funding cost is a key competitive parameter.
But as we have said before, when all these bads things are mentioned, it is important to note that the long-term demand for electricity is high given the electrification of our economy and thus if Orsted can stabilise the project side of the business then there could be a point in the future where the stock could become attractive again for the long-term investors. But in the short-term the risks are high for Orsted.
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