The Wind Blows: DONG Energy IPO Europe's Biggest In 2016 And GE Gets Serious About Wind In Europe

by: Keith Williams


DONG Energy IPO raises $2.62-3.02 billion: values the company at $15.05 billion; first trading in Copenhagen on Thursday.

GE rapidly building its wind business in Europe and US.

Shell sees a fossil fuel (oil and gas) future, with no need to hurry investment in wind.

Investors are inevitably confronted with different views of the world when they contemplate where to put their money, especially in areas involving structural change. This week in the energy space two contrasting views of prospects for investment in wind energy have been in the news.

The "there is no hurry" view : Shell

In a major review of its business and how it sees the future, Shell (NYSE:RDS.A) (NYSE:RDS.B) has indicated that it is thinking about investing in renewable energy. However this play is more about interacting with their gas business than building a renewable energy business in its own right. Shell sees no urgency in its investment in wind power, although its wind portfolio consists of 500MW spread over 9 wind projects in North America (8 co-owned projects, with Shell's share ~430MW) and Europe. Most of these projects were developed in the early 2000's and it doesn't look like there has been new investment since 2008. So Shell was an early adopter, and it seems to have stopped investing in wind almost a decade ago.

I am skeptical that Shell is serious about renewable energy investment.

There is another view of the role of wind energy in the transition from fossil fuels to renewable energy.

Wind energy as a major driver for exit from fossil fuels and adoption of renewable energy

Here I provide a contrast to Shell's complacency concerning wind power with recent dramatic wind business developments by GE (NYSE:GE) and the DONG Energy (DC:DENERG) IPO, which positions the company as an offshore wind company as it looks to exit its oil and gas businesses.

Contribution of wind power to the energy transition

While this is a big call, I suggest that the decarbonization of the global economy will be driven almost entirely by two technologies, wind and solar power.

Other than as a mechanism for large scale energy storage, hydropower is largely exploited. Fukushima signaled the end of nuclear power (and anyway centralized power generation is no longer seen as desirable in the new distributed energy economy). Wave and geothermal power will contribute, but the heavy lifting and major investment is going into wind and solar, which are already cheaper than new fossil fuel builds.

The balance between solar and wind power isn't clear at this stage, although it is likely that both domestic and large scale solar will increasingly become cost competitive. It is clear that a major expansion of wind power is now underway, both on- and off-shore.

Here are some figures for Europe in 2015, which explain why GE plans to double its share of the European wind market, and why this is a big deal.

12.8GW of wind power was installed in 2015 (up 6.3% on 2014); 3.0GW of this was offshore wind. Wind power was the biggest contributor to new power generation in Europe in 2015 (44.2% of total power installed) and wind power has overtaken hydro as the 3rd largest source of power in Europe at 15.6% of total power capacity.

Looking at other sources of new power, 29.4% was solar PV, bringing renewable energy to 77% of European power installation. Fuel oil and coal decommissioned more capacity than was built. Gas installations showed a high rate of decommissioning in 2015.

Of the 142GW wind power installed in Europe, most is found in Germany (45GW), Spain (23GW), UK (14GW) and France (10GW); 16 European countries have more than 1GW and 9 have more than 5GW wind power installed.

I have given the above figures because some people still think that wind doesn't work as a power generator, and wind turbines kill birds (cats and windows are much more lethal).

GE wind developments

WG Investment Research has recently written about why he thinks GE is a buy. Inherent to the analysis is that as GE disposes its GE Capital assets, it is transitioning to being focused on industrials. The analysis by WG Investment Research doesn't address what this means in practical terms.

GE is clearly aiming to be a major player in the wind energy space, both through organic growth as well as through acquisition. The recent completion of the acquisition of Alstom power is an example of acquisition. Note that 26.4 billion euros were invested in wind energy development in Europe in 2015 and this was 40% more than wind investment in 2014.

I suggest that this kind of shift is company defining, even for an industrial giant like GE. Wind power has the potential to become a major profit center for the company.

GE Renewables will deliver 3,050 wind turbines in 2016, up from 2,860 in 2015. Five of these turbines will be 6MW Haliades turbines for the first US offshore wind project off Rhode Island. Probably due to the 5 year extension of the Production tax credit in the US, wind turbine orders grew 144% in Q1 2016 in comparison with Q1 2015.

While there is a substantial focus on growing the European business, 50-60% of installations in 2015 were in the US. The Alstom purchase helps GE to further its international business, now with assembly plants beyond the US in Europe, Brazil, India and China.

DONG Energy's IPO

To be one of Europe's biggest IPO's for 2016 is the next step for DONG Energy as it moves along the path to become an offshore wind company and exit from oil and gas. Bloomberg has described this as "Europe's must-have IPO".

The challenge is that DONG Energy has no peers for comparison. Bloomberg makes the point that investors wanting exposure to renewable energy through a big company normally have to buy an old style energy company or utility, where the renewable investment is dwarfed by the old energy generation assets. Or investors can chance their luck on a risky emerging company such as SolarCity (NASDAQ:SCTY).

Dong is that rare big company with clear focus on the new technologies, with 75% of its capital employed in offshore wind power projects. The rest of the company involves its diminishing oil and gas business and a domestic Danish power distribution business. The expertise in offshore oil and gas has been redeployed in offshore wind investment. DONG Energy is looking beyond its European origins to become a major player in offshore wind developments in America and Asia.

In news just in the IPO has closed at a final offer price of DKK 235 ($36.03) giving DONG a market capitalization of $15.05 billion. Without overallotments 72,834,393 shares (17.4% of share capital) have been sold. This represents the maximum number of shares offered for sale.

An overallotment of 10,925,159 shares (15% of shares sold in the IPO) is exercisable until 8 July 2016. Depending on the amount of overallotment the gross proceeds will be $2.62-3.02 billion. The distribution to the 36,000 new investors involves 10% retail and 90% allocation to Danish and International institutional investors.

The company will begin trading on the Nasdaq Copenhagen under the symbol DENERG from 9 June 2016.

The DONG Energy shareholders post-IPO are :

The Kingdom of Denmark: 50.4%

New Energy Investment S.a.r.l. (Goldman Sachs vehicle): 14.7%

SEAS-NVE Holding A/S (Danish Private Renewable Energy company): 9.6%

ATP (Danish Pension Fund): 4.0%

New Investors (36,000): 17.4%

Others: 3.9%

The company has positioned itself as being attractive to utility company investors, but with upside. While there will be a token dividend this year for the loss making company, it is likely to be sub 3% (when Western European utilities commonly pay 4.2% dividends). The valuation is likely to be ~6x trailing EBITDA although it could be as low as 5 based on projected 2016 EBITDA of $3.0-3.5 billion.


I know that Seeking Alpha isn't keen on securities that are not easily traded in the US, but DONG Energy might be an exception worth looking at. It is really well credentialed, with major shareholders being the Danish Government, two other big Danish institutional investors and Goldman Sachs. And the company is as pure as an offshore wind play could get.

On the other hand I've provided some sense of how GE might be considered to be a renewable energy play, although of course by investing in GE you are investing in just about everything else too!

Investors looking to diversify their energy investments away from fossil fuels might consider the above in their deliberations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.