Citi Research downgrades Orsted to “sell” on U.S. risks, weaker balance sheet

Investing.com -- Citi Research downgraded Danish renewable energy firm Orsted (CSE:ORSTED) A/S to “sell,” citing mounting concerns over the company’s financial position and increasing uncertainty around its U.S. offshore wind projects.

Analysts pointed to the cancellation of the Hornsea 4 project in the U.K., which they said was a value-creating initiative, as a key factor that weakens the company’s balance sheet. 

While some investors have argued that scrapping the project could ease capital expenditures, Citi analysts noted that Hornsea 4 was not factored into Orsted’s DKK130 billion capex guidance for 2025 to 2027. 

As a result, its cancellation is unlikely to bring any near-term improvement to the company’s financial health.

Citi removed roughly DKK60 per share from its valuation following the decision to cancel Hornsea 4, bringing its new 12-month target price down to DKK211 from a previously published DKK300. 

The cut reflects both the lost value of the project and broader macroeconomic pressures, including higher U.S. interest rates and lower commodity prices.

Orsted has relied on selling stakes in legacy assets such as West of Duddon Sands, and may consider offloading interests in projects like Changhua 2b&4 and Hornsea 3 to cover an estimated DKK35 billion funding gap. 

But with limited visibility into how the company plans to address that shortfall, Citi sees further downside risk to the stock.

The brokerage also flagged rising risk in Orsted’s U.S. portfolio, highlighting regulatory uncertainty after the U.S. federal government issued a cease-to-develop order on Equinor’s Empire Wind project. 

Citi said the decision signals potential vulnerabilities for other projects, including Revolution Wind and Sunrise Wind, which could face additional capital costs tied to tariff structures and policy shifts under the Inflation Reduction Act. 

The valuation case for Orsted’s U.S. business has “long been eroded,” analysts wrote, with the focus now turning to how the company can contain further value loss.

Despite recent share price declines, Orsted still trades at a premium to book value at 1.1 times, above the 0.7 to 0.8 times seen among renewable energy peers. 

Citi expects that premium to erode, estimating that a valuation closer to 0.8 times book would imply a share price below DKK200, a nearly 20% decline from current levels.

Earnings expectations have also been revised downward. Citi’s forecast for fiscal 2025 earnings per share is now 25% lower, reflecting the impairment tied to Hornsea 4. 

Projections for 2026 and 2027 have also been cut, as anticipated gains from a 50% stake sale in the cancelled project are no longer expected.