Ørsted’s (DN:ORSTED) latest struggles have put the renewables transition under the spotlight once again, raising more questions about the best approach to energy investing.
The offshore wind giant’s shares plunged by 30 per cent earlier this month after it announced a DKK60bn (£7bn) rights issue, around 50 per cent of its market cap before the disclosure, alongside its half-year results. To add salt to the wound, S&P Global Ratings then downgraded its view on the company’s debt to the lowest level of investment grade. The shares have fallen almost 40 per cent this year and by more than three quarters over five years.
Source: LSEG
The company’s guidance for Ebitda to rise from DKK28bn next year to DKK32bn in 2027, from a forecast of DKK25-28bn for 2025, has led to analyst downgrades. The FactSet consensus has been trimmed back from its position of over DKK 33bn earlier this month. While Ørsted expects disposal proceeds of more than DKK35bn from the potential sale of its European onshore business, the outlook looks like it will be cloudy for some time to come.
Ørsted’s challenging situation is a good example of how political risk needs to be factored into investment decision making. The company — which is 50.1 per cent owned by the Danish state — was forced into the rights issue after it failed to sell a stake in its Sunrise Wind project, which lies off New York. Investors took fright at the growing uncertainty around renewable projects in light of the US administration’s sharp turn against green energy.
Ørsted isn’t alone in feeling the pain from growing uncertainty around the near-term prospects for green energy stocks. Higher interest rates and supply chain problems have dogged the sector in recent years, bursting the green energy bubble which expanded during the pandemic. The US’ approach of “drill, baby, drill” has added to the headaches for sector investors. The S&P global clean energy index is down almost 60 per cent since its peak in January 2021.
Investors face conflicting decision-making criteria when musing on the energy transition and portfolio selection. This is where debates around returns, geopolitics, energy security and environmental issues meet.
There are violently different opinions about whether owning shares in the big oil and gas beasts which are relatively regulated, transparent and have the financial firepower to change the energy landscape is the best approach to the sector.
With caveats, we tend to think it is. In the grand scheme of things, companies such as London-listed energy majors BP (BP.) and Shell (SHEL) may have significant problems but can feasibly be viewed as the least worst options.
The shares of each have risen this year amid talk of a potential tie-up. BP delivered quarterly trading improvement and announced its biggest oil and gas discovery in a quarter century off the cost of Brazil (a project it has called Bumerangue). Shell served up better than expected interim results despite profit sliding by a fifth.
Yet, there are clearly fundamental issues with these companies as investments, quite aside from any environmental or political considerations. As the IC put it recently, they face “zero price control and lack of demand growth”.
And their valuations remain well below US peers ExxonMobil (US:XOM) and Chevron (US:CVX), which trade on more than 6 times EV/Ebitda for 2026 compared to 3.4 times for BP and 3.8 times for Shell.
There are other options available for those seeking a way through the intersection of energy and politics. One of these is solar panel manufacturer First Solar (US:FSLR), a stock we have analysed at Alpha.
Short-term headwinds have hit the shares, which were a big beneficiary of the Inflation Reduction Act, but the valuation is undemanding. First Solar trades on 14 times forward consensus earnings for 2026, compared to more than 100 times as recently as 2022. The mean target share price of analysts surveyed by FactSet suggest they believe a double-digit return could be available.