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Morningstar | Orsted Pays a Decent Entrance Ticket to the Promising East Cost Offshore Wind Market

Orsted has agreed to buy Deepwater Wind, the leading U.S. offshore wind developer, for USD 510 million and an enterprise value of USD 700 million. We see a strong strategic rationale as the group gets a solid foothold in the promising East Coast offshore wind market where it has struggled so far. We have yet to factor in the farm-down of Hornsea 1, which would add DKK 15 to our fair value estimate. We reiterate our fair value estimate of DKK 430 per share, along with our narrow moat, stable trend ratings.

The price Orsted paid looks expensive, as there are only 30 MW of operating capacity. However, Deepwater Wind has three projects totaling 810 MW with imminent final investment decisions and are expected to be commissioned in 2022-23. One of the project weighing 120 MW, Skipjack, has a 20-year purchasing contract with a high price of USD 171/MWh and 1% price escalator. Taking conservative assumptions for construction and operating costs, we derive a high 15% IRR. Purchase power agreements, or PPA, are being negotiated for the two other projects. We calculate that a PPA price of only USD 95/MWh would be enough for this acquisition to be break-even value-wise.

Would Orsted have the financial leeway to fund the construction of the U.S. and Taiwanese projects? We think so. Bearing the construction costs of the 1.82 GW of Taiwanese projects awarded this year and these three U.S. projects would require total investments of DKK 50 billion by 2022 on our calculations. That points to total investments of around DKK 130 billion over 2018-23, which is at the upper range of the wide DKK 45 billion-DKK 140 billion guidance. We calculate that, during the period, FFO/net debt would remain above the 30% required for the group to keep its BBB+ rating.

Moreover, the group has options to get incremental funding. First, in line with its strategy, Orsted could bring partners during the construction phase. Also, the for-sale distribution business in Denmark could bring up to DKK 18 billion on our calculations.

In addition to the three projects mentioned above, Deepwater Wind has around 2.5 GW of development capacity on the U.S. East Coast. The market potential is significant since total targets of the sates of the Northeast and mid-Atlantic regions amount to 12-13 GW, which is 80% of installed offshore wind capacity in Europe at year-end 2017.