Vestas Wind Systems : Time To Scale Up Production (OTCMKTS:VWDRY)

In October 2022 I wrote a contrarian article about much unloved Vestas Wind Systems (OTCPK:VWDRY). At the time the share price was $6.10. Today it’s $9.84, up 61%. In my article I discussed a number of issues that were impacting the share price. Three months later some things are becoming clearer. Here I update on my October 2022 article. I suggest that many of the challenges for Vestas are now in the past and that good times are coming.

False narratives are demonstrably false

In my October article I addressed three falsehoods related to the European energy crisis caused by the Russian invasion of Ukraine. I contended that: i) Russia is not winning the energy battle, ii) the European crisis is not a renewable energy crisis, and iii) the crisis is not a setback for climate action.

Given that Europe has recognized that the abrupt loss of a huge amount of Russian fossil fuels requires rapidly scaling up of the exit from fossil fuels, it isn’t surprising that 2022 saw a massive increase in global renewables and energy storage projects. The overall picture was that new construction starts in 2021 were 286 GW and in 2022 this increased 42% to 402 GW. And it isn’t just Europe as Asia was the focus of renewable energy auctions, accounting for 77 GW of the 110 GW of new capacity auctioned in 2022. The future project pipeline increased by 2.2 TW, with offshore wind (594 GW) dominating the renewables pipeline, although it was closely followed by utility-scale solar PV.

The above summary of actual construction and project pipelines in 2022 makes clear that the argument that somehow the Russian invasion of Ukraine uncovered a deficiency in the renewable energy transition is demonstrably untrue. It’s worth reading about the consequences for Russian oil and gas, especially with a warm (extreme?) European winter meaning that the substantial European gas storage capacity has not been significantly accessed. The fact is that currently Europe does not have a gas crisis and its gas supply is secure beyond 2023. And Europe is massively expanding its renewable energy production, of which a large part is offshore wind power.

The interest in offshore wind developments is a global phenomenon. Of course some markets are bigger but it’s hard to find anywhere that has a coastline that is not contemplating offshore wind. For example Australia has gone from having no offshore wind industry to contemplating offshore wind projects (e.g. Star of the South 2.2 GW) that will materially impact Australia’s energy system. The same is true of Taiwan, Japan, South Korea, India, and of course the home of the offshore wind industry, Europe and Scandinavia. As is true for just about everything about the decarbonization of energy, China is massively expanding its wind capacity (both on- and offshore).

Vestas has 25 years of offshore wind experience, 8 GW of offshore capacity installed over 46 projects. Having the global supply network and skills to undertake complex projects makes a difference in becoming the technology provider in an offshore wind project.

Turbines are big enough, now is the time to scale up production

Vestas CEO Henrik Andersen said at Davos last week that offshore wind turbines have reached an appropriate size and now is the time to expand production. This is Vestas’ current focus and this isn’t surprising considering the massive expansion of offshore wind being experienced all around the world.

In 2021 Vestas launched its V236-15.0 MW offshore turbine, with a capacity factor of more than 60% and generating more than 80 GWh annually. The latest records for size of offshore wind turbines come from Chinese manufacturers with 16 MW (Goldwind (OTCPK:XJNGF)) and 18 MW (MingYang Smart Energy) turbines announced. These turbines have a similar production capacity to the Vestas V236-15.0 MW turbine.

Also on the sidelines at Davos, Vestas CEO Henrik Andersen announced a $300 million investment in South Korea and potential relocation of Vestas Asia-Pacific Headquarters from Singapore to South Korea. Vestas will build a turbine parts factory in South Korea for exporting product across Asia-Pacific. Given that South Korea is playing catchup on the renewables transition and it has plans for 124 offshore wind projects and just eight operating, a move by Vestas to focus on South Korea makes sense.

Global offshore wind takeoff

Recent analysis from the Rocky Mountain Institute shows that fossil fuels have already peaked in the electricity sector. The change is due to lowered costs, clean energy shift and big changes in global capital allocation from fossil fuels to renewables. Three major projects are spearheading this, the Inflation Reduction Act in the US, the REPowerEU Plan in Europe and the 14th Five-Year Plan in China. The World Economic Forum recently discussed some critical structural impediments to rapid expansion of the global offshore wind industry. It’s interesting that after several years of poor profitability in the wind industry, change is in the wind (so to speak!).

What the market thinks

Since my last report sentiment has changed for Vestas although this is based on minimal reporting on Seeking Alpha (one buy rating in past 30 days) and from Wall Street (one strong buy last 90 days). This is an astonishing lack of coverage for the world’s largest wind turbine manufacturer, perhaps because it is a Danish company. Seeking Alpha’s Quant rating has improved to a “hold” with now A+ for Growth and A for Momentum, but F for Valuation, D for Profitability and D- for Revisions. Seeking Alpha still has a warning that VWDRY is at high risk of cutting its dividend.

If not Vestas then who?

If the environment for wind investment (especially offshore) is compelling, the next question is whether Vestas, the biggest wind turbine manufacturer but a Danish company, might be a turnoff for US investors.

GE (GE) is a US company with a major wind turbine business, so why not GE? I have three reservations about GE. Firstly investing in GE currently involves not just its varied energy businesses, but also its aerospace business (noting that the GE HealthCare Technologies (GEHC) business spinout has been recently completed successfully). If complexity is not a problem, then GE might be interesting to US investors. However, a second reservation concerns what the GE Vernova energy spinout, due in 2024, will look like. I suspect there are some hard decisions to be taken, especially about the nuclear business which must be a cost drain on GE’s energy business. How this gets sorted out must impact GE’s successful wind turbine business, but where this is going isn’t clear. Finally there’s a patent issue concerning GE’s revolutionary Halide offshore wind turbine’s freedom to operate in the light of a proposed Siemens Gamesa (OTCPK:GCTAY) patent infringement claim. This has meant GE can’t sell the Halide in the US, but a UK decision may mean that the Halide can be installed in Europe.

Siemens Gamesa (OTCPK:GCTAF) is another major turbine manufacturer but it’s experiencing a number of problems that have impacted its profitability. It posted an Euro 760 million net loss in Q1 of the 2023 financial year, which follows an Euro 940 million net loss for financial year 2022. The 2022 issues related to supply chain issues, geopolitical tensions and COVID-19, while the recent quarterly loss is related to device failures (increased warranty provisions) that could take up to eight years to play out. The recent issues mean that guidance for 2023 has been reduced. It seems to be a challenging time at Siemens Gamesa, which is in part due to engaging in unprofitable business in recent times.

Xinjiang Goldwind is a major Chinese wind company that’s benefiting from huge increases in Chinese wind developments and also international opportunities. A lot of US investors seem cautious about Chinese investment at this time.

My take about investment is that we live in a global village and where we invest needs to take account of that. It’s easy for me because as an Australian much of my investment landscape is offshore. I acknowledge that this is a harder ask for a US investor, but if the case for Vestas is compelling perhaps investors might consider it. Of course balancing out the various pros and cons is “business-as-usual” for investors, and there’s always an opportunity for investment in a small group of wind companies or a wind ETF. In note that First Trust Global Wind Energy ETF (FAN) has performed better (down 5.7% year on year) than the S&P 500 (down 11%) over the past year. In the past three months FAN is up 20.7% (versus SP500 up 7.3%), but Vestas is up 59% over the same time period. This shows that picking the right stock can lead to substantial outperformance compared with an ETF investment. Note that FAN’s two major investee companies are Danish (Vestas, 9.24%, Orsted (OTCPK:DNNGY) 7.09%). GE represents 2.63%.

FAN’s investee companies give a good insight into the wind industry, with companies that have different positions in the industry. It takes work to sort out who does what and a number of the companies held by FAN undoubtedly have a position that in part reflect the importance of wind in the investee company’s portfolio. For example RWE AG (OTCPK:RWEOY) is the world’s second biggest offshore wind development company (after Orsted) but the FAN holding is just 2.33%, presumably because RWE has a lot of other businesses within the overall company (eg a substantial coal business from which it is exiting).

Are there problems with offshore wind?

It’s clear that onshore wind projects have met with resistance from groups concerned about changes to their environment (compared with a coal mine or coal power plant?). Offshore wind has attracted some attention from groups seeking to delay the energy transition from fossil fuels. The kinds of objections rarely have a strong basis. For example a recent article complained about a small number of humpback whale deaths near Atlantic City. The article itself acknowledged that preliminary investigation suggested that the deaths might have been caused by collision with ships, but the intention was to implicate a proposed offshore wind turbine project in a way that was not explained.

We live in a world where any change is contested, but I don’t see concerns about offshore wind being a serious problem for two reasons. Firstly, it’s becoming clear that the fossil fuel industry creates major problems at all steps of energy harvesting and burning the fossil fuel. This means that an offshore wind project is now seen in relation to the alternative (fossil fuel) energy provision. Secondly, the argument by the fossil fuel industry that there are not consequences of delaying decarbonization of energy is now being seen to be untrue. Climate emergencies on a scale not seen in living memory are now daily occurrences all over the world. Planners are realizing that climate costs are now becoming huge and increasing. This provides an urgency to address the climate issues. When your house is burning down, the first thing is to address the fire. Exiting fossil fuels is becoming seen as a major first step in addressing the climate emergencies that are now a feature of life everywhere. Offshore wind and solar PV are key technologies being used to address these issues.

Conclusion

Seeking Alpha still has a red flag warning for Vestas that concerns risk of a dividend cut, although the Quant rating has improved substantially. There’s no doubt that the offshore wind industry is under great pressure, especially from the fossil fuel industry as it realizes the huge threat that a technology that has a 50% capacity factor and just maintenance costs after the extraction facility (wind turbine) is erected. The point is that projects are being developed as the rush to decarbonize gains traction. There’s still work to do on permitting and getting pricing right, but my take is that offshore wind is now unstoppable. The question for energy investors now is whether they want to stay energy investors. If so then now is a good time to embrace wind investment and Vestas is hard to overlook. Remember the three big developments supporting offshore wind: The Inflation Reduction Act, REPowerEU Plan in Europe and the 14th Five-Year Plan in China…. and the flow on from these plans (eg South Korea).

I’m not a financial advisor but I follow closely the dramatic changes that are happening as the energy sector becomes decarbonized. I hope that my comments are of interest to you and your financial advisor as you consider your energy investments.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.