Oil Correlation Looks Misunderstood for This Big Energy Company

Should a renewable energy company do badly when the price of oil drops?

While investors in the energy industry worry that oil seemingly can’t find a floor, holders of Vestas’sbonds don’t need to fret.

That’s according to Denmark’s biggest bank, which says the market should stop falling into the trap of seeing a correlation between the price of crude and the performance of the world’s largest maker of wind turbines.

“There may be a lot of investors who instinctively expect that Vestas ought
to be hit by the low oil price, but that’s not the case,” Niklas Ripa, a senior credit analyst at Danske Bank, said by phone. “We can see from Vestas’s history that high order intake doesn’t need high oil prices.”

Ripa last week repeated a recommendation to buy Vestas’s 2.75 percent bond due 2022 and raised his shadow rating to BBB from BBB-. He says political initiatives, including the U.S. decision to extend a production tax credit by five years, are much more important for Vestas than the market price of energy.

Vestas’s bond has underperformed the market as crude prices have dropped.  

Oil is used to produce just 4 percent of the world’s electricity while coal accounts for some 32 percent and natural gas about 25 percent, according to Ripa.

“But despite the fact that both coal and natural gas prices have been declining for a number of years, Vestas order inflow has increased significantly,” he said.

Vestas probably won orders for 8,715 megawatts in 2015, according to estimates by Jyske Bank’s Janne Vincent Kjaer, the most accurate share analyst covering the company, data compiled by Bloomberg show. That would be a new record and an increase of 33 percent from 2014, achieved in a year when crude prices slumped by 35 percent.

While Vestas shares sometimes reacts to daily fluctuations in the oil price, that only reflects “short-term sentiment,” Kjaer said by phone.

“If we see the oil price continuing to trade at these levels in the long run, it will have a negative impact on Vestas because of the spill-over effect to other energy resources, including natural gas,” she said. “But one must remember that Vestas has succeeded in reducing the cost of energy considerably for its clients in recent years.”

Vestas’s credit profile is improving as the company builds up its service division, most recently through two acquisitions, which made “strategic sense” even though prices paid were high, Ripa said

“Vestas’s service business has undergone a significant expansion and it’s a very stable element compared with the turbine producing division, which can be affected by various demand swings,” he said. “It’s a strategy that’s good for both credit investors and probably also equity investors.”

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