If Ørsted hasn’t been on everybody’s lips yet, it is now. Named as the world’s most sustainable company of 2020, Ørsted is a true example of how a climate transition is possible — even by an oil and gas company.
But is it worth investing in Ørsted if you’re looking at returns? And what exactly makes Ørsted, a former oil giant, sustainable?
The Speed Read:
1. Ørsted is a true pioneer in the renewable energy sector and shares an impressive transition story on how to phase out from black energy, turn green, and continue to grow as a business.
2. Ørsted stock has been a tremendous success: its price has nearly quadrupled in the last several years and continues to be on the rise.
3. The stock trades at a premium, compared to its peers on the market.
4. Ørsted puts impact first and is transparent about their results and climate commitments, and is on the right path to be truly sustainable and carbon neutral. The company has issued many green bonds and is committed to building a greener future.
From fossil fuels to renewables: How Ørsted became the most sustainable company in the world
Historical overview: understanding the story
Ørsted’s story begins in the early 1970s, when Denmark was hit by the oil crisis. In order to become less dependent on oil from the Middle East and extract oil and natural gas from the North Sea instead, Denmark established a company called DONG: Dansk Olie og Naturgas A/S (Danish Oil and Natural Gas).
For nearly three decades, this state-owned company was managing oil and gas resources in the Danish region in the North Sea. The business was doing great. But like any great business (and any great portfolio), it needed one thing: diversification.
So in the early 2000’s, the company started to expand itself into the electricity market by building up shareholdings of electricity producers and distributors. Ørsted acquired a few of these companies, including Elsam which had installed the world’s first large-scale offshore wind farm off the west coast of Denmark in 2002.
The result? In-house expertise in wind power — and a change of mentality.
At the time, 85% of DONG’s power and heat production was “black” (i.e. oil and gas) and 15% was “green” (i.e. wind power). In 2009, the company laid out a bold and ambitious plan to phase out fossil fuels and flip that ratio around, so that at least 85% of their power and heat production would be green and 15% black. This apt transformation is now known as the “85/15 vision”.
By 2013, the company constructed the 400 MW Anholt Offshore Wind Farm off the Danish island of Anholt for €1.35bn.
By 2014, DONG divested its last onshore wind turbines, focusing on offshore wind power instead.
Between 2016 and 2017, DONG was listed on the Copenhagen Stock Exchange, and, at the same time, finally divested from oil and gas becoming a renewable energy company.
By 2018, their green energy output was 75% and the company had reduced its CO2 emissions by 72%. Oh, and they also changed their name from DONG to Ørsted, to commemorate Hans Christian Ørsted, the Danish physicist who discovered electromagnetism and laid the foundation for the modern generation of electricity.
Since then, Ørsted has gone from strength to strength, looking for growth opportunities overseas, expanding into the US and even Taiwan. The company has set a goal of producing 93% clean energy and heat by 2023, including reducing its coal usage to zero.
Great. But is Ørsted a good investment?
Ørsted holds one of the top positions in Cooler Future’s impact-first portfolio, designed for the climate-conscious generation of investors. And it’s not merely for Ørsted’s impressive sustainability achievements: this publicly listed company is a great investment return-wise.
So let’s talk about the Ørsted stock.
Since its IPO in June 2016, Ørsted’s stock price has risen 370% — or 41% annualised. Just look at Ørsted’s stock price graph right here:
Like most other companies, it had a bumpy ride in March 2020 as the market panicked due to the global coronavirus pandemic. However, it has since recovered very quickly and significantly surpassed its pre-corona level. There are several reasons for the Ørsted stock being such a strong performer:
- Investors believe that any project delays and decreases in power prices are short-lived and will not significantly affect Ørsted’s growth;
- Ørsted has a strong track record of delivering, has already established itself as a market leader in deploying offshore wind farms, and has a healthy pipeline of contracts;
- Its scale and expertise allow it to keep costs down and win more renewable energy tenders;
- The regulatory environment is hugely in favour of the transition to renewables, pushing to gradually phase-out fossil fuels. Ørsted is already a leader in this transition.
In other words, the Ørsted stock is strong because the company is, and has been for a while, in the right place at the right time.
In-depth Ørsted stock analysis
Yet of course, investment pros look not just at the price graph, but also at the valuation and risk metrics. Let’s start with it’s debt situation under the Structure section:
Current Ratio (Curr Ratio), which is current assets / current liabilities, is a measure of the company’s ability to pay liabilities due in the short term with liquid (i.e. easily available) assets, such cash in the bank, money market instruments, liquid stock investments, etc. This figure is a healthy 2.0, meaning that Ørsted can cover its current liabilities twice over with current assets.
Debt/Assets is an indicator of the amount of leverage the company is taking. At 21.9%, leverage is relatively low given the industry and indicates a healthy balance sheet.
Finally, EBIT/Tot Int Exp is the Earnings Before Interest and Taxes (EBIT) / Total Interest Expense and measures how many times the company can cover its total interest expense with earnings. Here, the number is 6.0 times, which is a good indicator of ability to pay interest on debt borrowed.
Food for thought:
We will not go through all the metrics here but encourage you to look them up and compare across companies within the same industry. This is what out our investment team keeps themselves busy doing constantly for our entire portfolio!
Ørsted share price forecast
Having reviewed debt, earnings, cash flow and profitability metrics, it’s time to turn to market valuation. As already mentioned, Ørsted’s stock price has shot up since its IPO in 2016 and it is even higher than it was pre-corona. So a very fair question to ask oneself is: has it risen too much? Is it fair value?
Keep on reading.
There are several ways to look at this.
One is to look at the company's P/E or Price/Earnings ratio, which tells you how many years of earnings the company’s shares are costing you. In Ørsted’s case, the P/E ratio is almost 30, which means that the price you are paying for a share is 30 times higher than Ørsted’s per-share earnings (EPS).
OK, but what about forward earnings (i.e. estimated earnings in the near-term future)?
Well, if we take the forward estimated earnings (Est EPS), then the P/E ratio is even higher — 54 times higher, in fact! This is because the company's earnings are depressed in the near-term future due to a corona-related slow-down in projects, lower energy prices and because the company is investing heavily (see capital expenditures > €3bn in the table below).
You can also see this if you look at the addition to the total installed power generation capacity that Ørsted is adding, most of this is obviously to its core business of wind power:
All in all, this makes Ørsted a well-priced stock that trades at a premium, compared to its peers as the market perceives it has better prospects to grow faster and, therefore, more profitability than the rest.
Ok. Ørsted seems like a good investment. But is it truly sustainable?
As mentioned above, Ørsted’s mission is to create a world that runs entirely on renewables — and so far, they’ve made great progress. But as any company, Ørsted itself needs energy to operate. So as they’re delivering a sustainable product itself (wind energy), are they doing it in a sustainable way?
Let’s face it: when investing, you don’t just invest in a company’s product — you invest in the entire company and its operations. And if those operations aren’t sustainable? Then the product, no matter how good it is, would have a stain of greenwashing on it. At the end of the day, companies themselves need to operate in a way that creates progress and heads towards sustainable goals.
Now, as a company, Ørsted has a climate action plan that is aligned with the Paris Agreement. According to their plan, they’re on the road to carbon neutrality and the entire company's carbon footprint is aligned with the 1.5°C pathway. Ørsted is on the mission to be carbon-neutral by 2025 in Scope 1 and is committed to reduce it’s Scope 3 emissions by 50% by 2032.
Ørsted has already reduced its emissions by 86% — from 18m tonnes in 2006 to 2m tonnes in 2019. They continue reducing their emissions aiming to hit a 98% reduction target by 2025. 💪
They’re also tackling indirect emissions that are outside of their immediate control. They’re actively engaged in decarbonising their supply chain and energy trading, aiming to be carbon neutral a decade earlier than required by science:
When counting emissions, all emissions rising directly or indirectly from the business have to be accounted for. Direct emissions come from energy generation and company operations (Scope 1); indirect emissions come from energy consumption (Scope 2) and from supply chain and energy trading activities (Scope 3). an>
What exactly does Ørsted do to reduce emissions? Here’s their plan, in a nutshell:
- Complete phase-out of coal by 2023
- Install 15GW of offshore wind and 5GW onshore wind by 2025. 33% of the onshore target and 66% of the offshore capacity has already been installed with an additional 66% awarded or in the pipeline
- Orstead is also partnering with other companies to move towards a greener future. For example, they recently signed an agreement with BP to jointly develop an industrial-scale electrolyser project for green hydrogen production in North-West Germany. The project is expected to produce one tonne an hour of green hydrogen or almost 9,000 tonnes a year. This would be sufficient to replace around 20% of the current grey hydrogen consumption, avoiding around 80,000 tonnes of CO2e emissions a year (which is the same as emissions from around 45,000 cars in Germany).
- Last but not least, Ørsted will continue to drive out the remaining emissions from its energy generation and operations by investing in innovation and offsetting any residual emissions through certified carbon removal projects.
The last bit leads us to the next, and final, point: Ørsted and it’s green bond and loan projects.
Ørsted and green finance: what you should know
Not only individuals (like us) can invest in assets or projects — companies can do this too. Ørsted is no exception. As a company, it invests in projects all over the world, from Taiwan to Germany to the UK.
Ørsted invests in green energy projects. In their 2019 report, the total of 6GW green bond project capacity at Ørsted was enough to supply more than 15 million people with green energy each year! The emissions avoided from the allocated green finance proceeds totalled more than 2 million tonnes of CO2e in 2020:
Ørsteds Green Finance Framework is aligned with the Green Bond Principles set out by ICMA (International Capital Markets Association). These are guidelines that recommend transparency and disclosure and promote integrity in the development of the green finance market. The framework has also been reviewed by the Centre for International Climate and Environmental Research in Oslo (CICERO).
Ørsted and bonds: How do they select projects?
Proceeds from green bond and loan issuance are used to finance the acquisition, development and construction of new eligible projects and to renovate and upgrade existing eligible projects.
These eligible projects promote the transition to low carbon climate resilient growth and a sustainable economy. They include:
- Offshore wind farms and other renewable energy production types: Development, construction and installation including funds for wind turbines, blades, foundations, cables, transmission assets and any other element relating to the completion of renewable energy projects.
- Bioenergy: involves taking energy from biological matter, i.e. biomass. Ørsted is involved in converting power stations burning coal and gas to sustainable biomass instead! The biomass must be sustainable so that the incineration is CO2 neutral and biodiversity is protected.
- Energy storage, smart grid and other energy solutions: here, investments cover storing of energy and installing smart meters with consumers for a smarter grid.
However, is Ørsted being fully transparent?
At Cooler Future, we truly think so. For four reasons:
Firstly, Ørsted has specifically committed to not finance nuclear or fossil energy generation projects through green finance.
Secondly, all projects are evaluated, selected and prioritized in co-operation between their Sustainability and Treasury departments and scrutinised further by their Sustainability Committee.
Thirdly, the funds are segregated into a Green Account which is used to fund the Green projects, although unutilised funds are available for the firm to manage their day to day liquidity.
Finally, they provide an annual Green Bond Investor Letter, which contains a lot of detailed information about the financed green projects and amounts allocated to them. Now that’s what we call transparency!
In conclusion: Is it worth investing in Ørsted?
If you’re looking for a company that delivers returns, positive climate impact, and a great mission — you found one. Ørsted is a textbook example of how it is possible to transform climate risks into business opportunities, turn away from fossil fuels in favour of renewables, and be more successful than ever.
Ørsted is aligned with the Paris Agreement and predicts good financial returns for those who’ve invested in its stock.
There is, of course (and as always), still work to do. After all, when it comes to energy production, there is, unfortunately, no such thing as ‘perfection’. Transition to wind or solar energy typically requires more land (which is a limited resource), so, while such transition is absolutely necessary, companies like Ørsted will still have to figure out how to keep optimizing and innovating to be even more environmentally friendly.
You can invest in Ørsted with Cooler Future, a carefully curated portfolio of climate winners that deliver both impact and return on investment.
Investments are associated with risks. The value of your investment can fall or rise and the capital invested may be lost. Past performance is not an indicator of future results. This information is for illustrative purposes only and is not investment advice.