Equity Research Report

Orsted Energy

November 2020

Orsted Energy Author Information

Orsted Energy is a Danish multinational Power company at the Sector Manager
forefront of the global energy transition. The firm was previously Name: Oliver Begley
known as ‘Danish oil and gas’ prior to selling entire upstream Email: begleyo@tcd.ie
fossil fuel business in 2017. Today, the have ambitious targets in
place to produce 99% of their energy from renewables sources by Senior Analyst
2025. Name: James Deegan
Email: jadeegan@tcd.ie
The Energy sector re-iterates our buy rating on Orsted based on
an implied upside of 24% from a DCF model, coupled with our
strong thesis surrounding Orsted’s rapid expansion into the U.S Senior Analyst
for 2021 Name: Kristian Robertson
Email: robertkr@tcd.ie
The companies Q3 earnings report drastically beat analysts
expectations by issuing EPS 9% above estimates. The firm
outlined major increases in energy production across both
onshore and offshore segments while also recording record levels
off offshore construction.
1
 Revenue by segment %
Business Overview
Orsted is a Danish power company that focuses on 3 prime
Offshore Wind entities, Offshore wind, Onshore and Markets & Bioenergy.

Onshore Offshore wind - Orsted constructs, owns, and operates offshore

44%
55% operations wind turbines across the world. They have built more offshore
Markets & wind farms than any other developer and aim to double current
Bioenergy wind capacity by 2025. The firm’s offshore operations are most
1%
prevalent in the US, Taiwan, Denmark, Germany, and the UK.

Revenue & EBITDA (DKK bn) Onshore – Operates and owns 7 onshore wind farms, and 2
80000
solar fields in the U.S; Currently constructing 2 further wind farms
and installing 687Mw of solar energy; Operate 2 battery storage
60000 facilities in the U.K adding stability to supply.
40000
Markets + Bioenergy – Generates heat and power from
20000
combined heat and power plants in Denmark; sells power from
0 wind turbines and gas plants in the wholesale and retail markets.
2014 2015 2016 2017 2018 2019
Distributes power in Denmark and optimizes energy portfolios.
Provides route-to-market services for third-parties
Onshore operations by #
of licenses

Investment Thesis
Solar
Strategic position in the U.S
As the U.s adapt their energy policy to support a green future
Onshore wind
they will soon roll-out licences for onshore & offshore energy
operations. Orsted’s current market leading position in the U.S
0 500 1000 1500 2000
positions them strategically to obtain multiple additional
licences. The company has recently submitted bids for up to
Orsted Offshore wind
installed capacity (MW) 2.5GW in New York with an outcome expected before the end
of the year.
6000
4000
Additional stimulus tailored at climate change/recovery
2000
As economies emerge from the Covid-19 crisis we continue to
0
see encouraging stimulus packages tailored at propping up
the renewable industry. Given Orsteds leading BBB+ balance
sheet, cash of 473M DKK and geographically diverse portfolio
they are best positioned to capitalize on further Stimulus.

Markets + Bioenergy Competitive advantage in fragmented industry

100% Orsted are the global leader in innovation and large-scale
Power Sales
80% deployment of offshore wind technology. As market leader
60% Power dis they can produce at lower costs, and overcome the industries
regulatory, environmental, and licencing issues with minimal
40% Power gen
delays. A problem that destroys smaller competitors
20%
Heat gen
0%
2
 New energy installations by Industry Overview
source Offshore Wind – 6.1 GW installed in 2019 a record year for
6% offshore wind. The same capacity is expected to be installed in
Renewable
16% 2020 highlighting how Covid-19 has had little effect on the
Large hydro industry. Europe continues to lead installations followed by Asia
16% Coal Pacific. Estimated that 205 GW will be added globally through
53%
Gas 2030 with 900,000 jobs created. Crucially low oil prices have
Nuclear increased the cost competitiveness of off-shore due to decreased
9%
competition for vessels and lower transport costs.

Onshore Wind + Solar PV - 2019 onshore wind electricity

EU Electricity Consumption
generation grew by 12%. Growth in 2020 has been slowed by
(MWh)
250000 Covid-19 and short term US growth will be further slowed by the
230000
phasing out of the Production Tax Credit (PTC). Solar PV
increased by 22% in 2019 a record year. Covid-19 will lead to
210000
short-term installations slowing but long term growth prospects
190000
remain healthy as Solar continues to expand globally.
170000
150000 Markets and Bioenergy – Power Prices were badly affected by
Jan Feb Mar Apr May Jun
Covid-19 as power grid usage has suffered globally due to
lockdowns in many countries. In Europe negative power prices
Offshore energy installations (MW) were regularly recorded in the first nine months of 2020 as
demand dropped by 5-7%. S&P Global Forecasts a partial
40
recovery in power prices between 2021 – 2023 as demand
30 recovers but forecast prices remain 20% below what they were in
20 November of 2019.
10
0 Risks
2022
2019
2020
2021

2023
2024
2025
2026
2027
2028
2029
2030

Delays Due to COVID-19 - Orsted has seen delays in their

1.4GW Hornsea Project Two in the UK and the 900 MW Greater
Onshore Exposure Changhua 1 & 2a in Taiwan. Orsted’s aim to increase their
battery storage facilities in the U.K has also been tampered due
Market 21% to Covid-19. Overall the short-medium term impact is minimal,
Exposure
although if Covid-19 continues deep into next year the firm noted
in a recent report that major offshore projects could face delays.
Power
Purchase
Agreements
Delays Due to Permitting Issues- Orsted are seeking to
79% increase their foothold on the US Energy market with plans to for
several new windfarms off the cost of the US. However, offshore
project delays are ”highly likely” due to delays from the Bureau
Projected U.S permits released of Offshore Energy in deciding the layout for the wind farms.
6
Quarters 2021

Market Risk- The energy market by nature is volatile, however

4 Orsted manages this risk by hedging their exposure to energy
2 markets, by focusing on long-term contracts and divestment of
assets.
0
Base Best Worst
3
Financial Summary
Income Statement
All in DKK bn 2018 2019 2020E 2021E

Revenue 75,520 70,398 60,298 62,698

EBITDA 28,491 19,020 17,620 23,645

% margin 17.9 26.3 30.59 37.71

EBIT 7,524 12,277 10,333 15,245

% margin 10 17.40 17.10 24.31

Net Income 18,251 7,181 9,821 9,870

% margin 24.17 10.20 16.29 15.74

Orsted’s financials have been fluctuating in recent years. Drastic drops were seen in 2019 as they were
faced with plummeting gas prices and an increase in depreciation. The recovery has been imminent
despite depressed power prices in the trailing 12 months. An increase in output at Borrsele 1 & 2
offshore wind farms should boost earnings in coming quarters while long lasting offshore wind
partnerships are anticipated to yield higher earnings. A bottom line increase in both revenue and net
income is expected even with a sluggish future outlook for power prices demonstrating strength

Capital Structure Key Financial Metrics

All in DKK bn As of 27/11/2020 Firm Industry
Current Share Price 1,126.50 Gross Margin 30.5% 26.5%
No. of Shares Outstanding 420.10 EPS 36.83 30.1
Equity Value 473,204.3 Gross Investments 21bn 2.1bn
(-) Cash & Equivalents 33,144 Credit Rating Baa1 Bb+
(+) Total Debt 40,640 Quick Ratio 1.588 0.954
(+) Non-Controlling Interests 2,790. Debt/Equity 0.48 0.81
(+) Preferred Stock - Return on assets 8.37% 6.5%
= Enterprise Value 483,490.3 Div. yield 5yr avg 1.73% 0.92%

Orsted’s cash and debt levels are considerably Orsted outperforms the industry average an
more appealing than highly leveraged each metric above. Its gross margin exceeds
competitors, namely Fortum. Their healthy ratio the mean value by 20% despite plummeting
offers flexibility as they grow their portfolio in the power prices. The company is fuelling organic
U.S. Total debt is currently 81% covered by cash growth through its high level of
and equivalents. Current low debt levels will investments,(21bn). This investment Is
enable Orsted to take advantage of debt laden primarily focused on offshore wind In the U.K
competitors by swopping in and gaining and U.S from 2020-2023. The firm’s above
increased market share. Orsted has no preferred industry average credit rating is a vital
stock competitive differentiator for acquiring
additional licences
4
 ORSTED YTD Share Price Graph
$1,200.00

$1,000.00
Share Price Graph
$800.00

$600.00
Over last year
$400.00

$200.00

$0.00
1/2/20 2/2/20 3/2/20 4/2/20 5/2/20 6/2/20 7/2/20 8/2/20 9/2/20 10/2/20 11/2/20 12/2/20

Valuation Firm Industry

Comparable Companies Analysis P/E 29.90 17.02
Orsted’s financials demonstrate that the company Fwd. P/E 43.55 17.22
is trading at a premium. The
firm’s P/E ratio stands at double the industry PEG 3.97 6.10
average and is attributable to phenomenal growth P/B 4.98 1.83
in recent months. Analysts are anticipating similar
P/S 8.22 1.76
growth for power companies in 2021 as the
transition away from fossil fuels continues. EV/EBITDA 27.32 11.85
Orsted’s PEG value outperforms competitors and
ROE 20.4% 8.9%
further outlines the firm’s strong competitive
advantage and ability to outperform, D/C 29.6% 21%
despite depressed power prices.
DCF Output: 2% Perpetuity Growth

Orsted’s soaring ROE rate is bound to

facilitate future organic growth. Our thesis
surrounding the companies' ability to obtain
more licenses than anticipated is extremely reliant
on ROE, particularly as permits in the U.S
permits are rolled out. The industry median
values were derived from Orsted’s top 7
competitors E.ON, RWE AG, Uniper SE,
Fortum Oyj, National Grid PLC, SSE PLC, and
Centrica PLC. DCF Output: 20.0x Exit EV/EBITDA Multiple

Discounted Cash Flow Analysis

The DCF model yielded a convincing upside of
24%, setting a price target of $1,396 for Orsted.
The majority of this growth is reliant on Orsted’s
aim to become the leading offshore wind
producer in the U.S by 2022. A perpetuity growth
rate of 2% was assumed despite the average
growth over the last 10 years standing at 7.5%,
likewise an exit multiple of 20x was used.
5