Warren Buffett once said you should invest in utility companies to stay rich, not to get rich. On the surface, utility stocks seem like a shoe-in – since everyone on the planet pays utility bills and requires energy to survive. But utility companies are going through a tough ordeal, with competition from other energy sources and turbulence on the world markets. The economic crisis worldwide has especially extended to European utility companies struggling with lower demand and competition from cheap coal.
This would certainly be the case with Dong Energy – a utility entity from Denmark owned by the government. Dong is a major owner of offshore wind farms across Europe, but it also delves into oil and gas ventures.
Where the company truly went wrong was the bad number of investments in natural gas.
The company originally planned to go public in 2008, but it turned back in the wake of the world financial crisis.
Dong has been on a downturn as of late, but CEO Henrik Poulsen is hoping get things back on track by focusing 50 percent of investments on wind assets and 40 percent on conventional energy exploration, Reuters reports.
And there is total financial restructuring involved – including reducing costs by 20 percent. Dong also wants to increase its wind power from 2 GW to 6.5 GW by 2020.
There is no word on when the Danish government will take the company public; however, Goldman Sachs (NYSE: GS) is planning to purchase a 19 percent stake in the company for $1.46 billion. Danish Pension funds ATP and PFA are also purchasing small shares that comprise seven percent in total.
Dong will get a bump from its new investment backers. Goldman’s aim is to improve the company and gain over the long-term.
You may be wondering why Goldman Sachs and others are purchasing stakes in a utility company that has not performed well, but these investors have been reassured through a clause in the deal that allows them to give back the shares if Dong does not go public by 2017.
After these purchases, the government’s stake in the company will go down from 81 percent to 60 percent. The rest of the stakeholders are local energy companies.
If you’re thinking about investing in this company down the line, here are some things you should know.
Dong is 36 billion crowns, or $6.5 billion, in debt, and it has a +BBB credit rating. Both Standard and Poor’s and Fitch have negative outlooks, Reuters reports.
Dong has had to lay off over 1,000 workers in the past 12 months. Overall, it has about 8 billion crowns ($1.5 billion) worth of assets.
To remedy the company’s standing, there is a plan to raise 6 to 8 billion crowns worth of equity – something analysts consider a positive step in improving Dong’s financial situation.
Dong has a divestment plan of non-core assets amounting to 1.2 billion crowns ($218.5 million), and it is also selling its assets in the amount of 10 billion crowns ($1.8 billion).
Is Dong Worth It?
Dong may not be in great shape, but it sounds like company officials have a good strategy for a potential rebound.
In terms of investing in this company, I would follow the Buffett rule for utility companies – viewing Dong as a strategy to maintain your energy portfolio in the future as opposed to getting rich from it.
Scandinavia has been relatively untouched from the European economic crisis, but the financial world is interlinked like never before, and just about every corner of the globe is affected by struggling economies in some fashion.
Dong’s IPO could be a game-changer for Scandinavian utility companies, since this could pave the way for more utility IPOs in the region. It could very well be a signal that Scandinavians are ready to share more of their energy sector with foreign investors.
And there could be a saving grace for Dong down the road, since natural gas will likely gain traction as governments like China plan to invest more in the commodity to lower the use of coal. Coal is expected to fall in demand in Europe as well, as a result of a milder winter and tougher government policies. Nations like Germany have been relying on coal for energy needs, but solar power is becoming a top energy priority.
Germany is one place where Dong has wind operations, along with Britain and Denmark. Even though the Germans are mostly focused on solar power, wind could gain more headway as renewable power usage increases in Europe.
The best way to find out if Dong is worth getting into is to see how Goldman and other shareholders react to the company and what Dong is doing from now until 2017, when its financial report will be released.
In the meantime, you’ll have plenty of time to find out if this company is worth it.