Equinor’s Orsted bet is cheap route to green goals
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Oct 7 (Reuters Breakingviews) -The battered offshore wind industry is getting a fillip of sorts. On the same day as it emerged BP BP.L may water down pledges to cut oil output, Equinor EQNR.OL revealed a 9.8% stake in Denmark’s $26 billion Orsted ORSTED.CO, the world’s largest offshore wind developer. Given the Danish state’s 51% stake renders any full takeover bid unlikely, the main appeal for the $77 billion Norwegian buyer is that it represents a cheap way to hit its green targets.
One of the reasons European oil groups have traded at a discount to U.S. rivals like Exxon Mobil XOM.N is their more gung-ho approach to renewable energy. While Shell SHEL.L and BP are now re-emphasising oil output, and Equinor always left its own route out of crude fuzzy, some of them still have green power capacity targets. Equinor wants to grow installed renewable capacity comprising offshore wind, solar and onshore wind from just 900 megawatts currently, to 12 to 16 gigawatts by 2030.
In theory, the Norwegian driller’s renewables pipeline of over 20 GW means it could simply build this on its own. But there are advantages of reducing the scale of the challenge via a bet on Orsted instead. The Danish group’s market value has shrunk by over a third since 2023, due to supply chain delays, inflation, higher financing costs and regulatory setbacks. And Equinor has probably paid less than the $2.5 billion paper value of Orsted shares based on the latter’s Friday closing price, as it has accumulated the stake over time.
Buying rather than building currently looks cheaper. Moving giant wind turbines and assembling them in the middle of the sea usually costs about $3 billion per GW, according to industry sources. Because Orsted already has over 10 GW of installed capacity, buying 10% of the company allows Equinor to consolidate 1 GW to its book immediately, and at a discount.
For wind mavens, it’s less of a morale boost than if Equinor CEO Anders Opedal had chosen to build a slew of new capacity itself. But the group’s own estimated internal rate of return for developing renewables is merely 4% to 8%, and its main U.S. project - Empire Wind - skewed to the low end of that range. Oil investors don’t much like that, or the operational risks of getting wind power up and running.
Orsted CEO Mads Nipper has largely managed to steady the ship: input costs have stabilised and governments are offering chunkier green subsidies. That makes it a reasonable time to bet on offshore wind – even if Opedal is only doing so in a partial sort of way.
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CONTEXT NEWS
Equinor said on Oct. 7 it had built a 9.8% stake in Danish offshore wind farm developer Orsted. The stakes are valued at around $2.5 billion based on Orsted’s closing price on Oct. 4.
Equinor said its ownership position has been built over time, through a combination of market purchases and a block trade.
The transaction would count towards Equinor's renewable energy portfolio target, adding 1.7 gigawatt (GW) of net generation capacity out of the company's goal of installing 12 to 16 GW by 2030, CEO Anders Opedal told Reuters.
At the end of 2023, the company had less than 1 GW of installed renewable capacity.
Orsted's share price rose more than 8% on the news before paring gains to stand 5.8% higher at 1300 GMT. Equinor's shares fell by 3.9%.
An Orsted spokesperson declined to comment.
Equinor said it did not plan to raise its stake beyond 10% and would not seek board representation.
UK oil major BP has abandoned a target to cut oil and gas output by 2030, Reuters reported on Oct. 7 citing three sources with knowledge of the matter.
Orsted shares have plunged since last year https://reut.rs/3ZSQ298
Editing by George Hay and Streisand Neto
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