Orsted: the world’s most sustainable company?

Clim8’s CIO Vincent Gilles shares another example of a company included in the portfolio that we have curated at Clim8.

Orsted is one of the few names in the clean energy space which is generally well known.

There is a good reason for this: this Danish company has turned itself from a traditional Government-owned and run Oil & Gas company into a recognised world leader in wind energy [1] changing its name on the way from DONG to Orsted.

By virtue of doing so, the company has not only become more profitable [2], which was not obvious at the start of their process, but also more valuable for its shareholders. The share price has nearly quadrupled in less than 4 years [3]. And it has also won awards, for example the prize of the world’s most sustainable company.

Orsted is one of the top positions in our portfolios, held through several of the leading sustainability funds that we have curated through our in depth “due diligence” process.

As a reminder, we invest into a wide range of carefully selected shares and funds, all focused on sustainability. Orsted is regularly one of the top 20 positions in such funds.

A couple of figures to start with:

• Orsted currently owns and runs about 7GW of off-shore wind assets with 3 GW in construction to be online by 2023 [4].
• The company’s goal is to reach 15 GW by 2025, which should produce enough power to supply up to 30 million people (or equivalent to 45% of the UK population, an amazing figure) and finally 30GW by 2030.
• Like the UK, Denmark is well supplied in natural wind resources [5] and, on average, Orsted’s assets produce more per MW of capacity than most other offshore assets [6]. 

We touched upon offshore in our article on Greencoat UK Wind plc, another one of our top holdings, but it is worth having a couple of figures in mind about the rise of offshore wind:

• The UK has ambitions to go from 10GW in 2019 to 40GW in 2040
• Germany from 8 to 20GW
• Japan from 0 to 5GW
• The US from 0 to 20GW [7]

That tells you how ambitious Orsted’s targets are (or how slow the rest of the world is reacting). 

The big kick behind this drive is politics and the ambition of so many countries to be as close to carbon neutral as possible by 2040 or 2050. But technological progress can also help enormously. The  cost of manufacturing a MW of off-shore wind capacity collapsed in the last few years as wind turbines became bigger (sorry not bigger, gigantic!). Today, the cost of producing power with off-shore wind compares with that of generating with coal and gas [8].

In other words: we can produce both cheap and zero carbon already now. 

Through the transition from an Oil & Gas national champion to its current state, c90% of power generated is zero carbon [9], Orsted has reduced its emissions by 86% since 2010, avoiding 11 million tonnes of carbon [10].

That’s about the same as telling 6 million  people to stop using their car for a year [11].

The company‘s ambition is to remove the last piece of coal-based generation by the end of 2023 [12]. It even has the ambition to have its scope 2 and 3 emissions (i.e. the indirect emissions resulting from their clients using Orsted’s energy) down by 50% by 2032 vs. 2018 [13].

Of course, these are very aggressive and lofty goals but. so far, Orsted has achieved its targets. And there is no better way to keep a company on its toes than by having very aggressive targets!

So is everything perfect in the Kingdom of Denmark? (sorry, could not help!) Yes, in principle, but there are some issues investors should keep in mind:

• First. The stock has been a tremendous success. As said, the stock price has nearly quadrupled in less than 4 years and it is up nearly a third in 2020 [14]. So, we cannot argue that no one has heard about Orste. But it is one of the very few ‘pure plays’ investors can turn to when trying to invest low / zero carbon. 

• Second. As a result, in our opinion, the stock could be described as well priced with a ratio of stock price on future earnings above 48x, as we write, which is significantly higher than many of its competitors (admittedly there are few of them) and peers (a slightly bigger group) [15]. Typically, companies involved in clean power generation would trade close to 30x (for example, NextEra in the USA, also one of the companies that is likely to be in our top 20 holdings at any given time) [16]

So, using a slightly technical term, Orsted is currently trading at a premium to its peers which we believe is explained by the market perceiving it has better prospects to grow faster and more profitably than the rest of the crowd. 

A last word on Corporate Governance: the current CEO,  Henrik Poulsen announced earlier this year in June 2020 that he was stepping down [17]. When the company announced the appointment of Mads Niper (the current CEO of Grundfos), we found remarkable the fantastic transparency of the company regarding the remuneration of the incoming CEO, a real example of great governance put into practice to the benefit of investors.

Investments of this nature carry risks to your capital. Investing in private equity involves a high degree of risk. Please invest aware. Please note this information is for illustrative purposes only and it must not be construed as investment advice. Past performance is not a reliable indicator of future results.

Sources

[1] Credit Suisse Utility Workbook 2019
[2] Orsted Annual Report 2019, FactSet
[3; 14; 15] FactSet
[4] Orsted H1 Financial Report 2020
[5] Global Wind Energy Council
[6; 12; 13] Orsted
[7] UK Government, German Government, EU Commission DG Energy, Global Wind Energy Council
[8] BNEF, Credit Suisse
[9] EU Commission, Danish Government, Orsted
[10] Analyst Presentation, Orsted, 2019
[11] EPA for the calculation of how much a car emits
[16] FE Analytics, FactSet, Clim8
[17] Orsted, Company Announcement, July 2020