Like Saudi Aramco, Dong Energy is now in the midst of preparing for an initial public offering.
The Danish energy giant’s June listing is expected to value the firm at up to $16bn (£10.9bn), making it one of the biggest flotations of the year. It will of course be dwarfed by Saudi Arabia’s oil colossus, which has been valued (perhaps overenthusiastically) at up to $2trn, but it’s still not to be sniffed at.
I think the two energy companies make for an interesting comparison. On one hand, you have Saudi Aramco – a longtime oil Goliath that has provided the Gulf state with lucrative revenues, but has recently fallen into comparatively tougher times as a result of the oil price rout. Saudi Arabia has now had to stop using its oil revenues as a piggy bank, has tapped the debt market and will be tapping the equity market in order to get rid of its deficit (which came in at a national record of $98bn last year).
I’m sure its plans to raise money will succeed, as well as its new strategy to diversify its economy away from black gold. But what for oil itself? Where will it sit in a rapidly changing energy sector where it must compete with other sources such as shale, at a time when the West is pushing energy-efficiency and a move to renewable power, while China’s energy demand is slowing down as its economy slows?
This brings me on to Dong. The energy firm, which counts the Danish government as its biggest stakeholder, used to have a major focus on coal but has now transformed itself into the world’s largest offshore wind farm operator. It has tried – unsuccessfully – to sell its oil division, as it looks to shed its “dirtier” assets to become greener than green.
Its efforts have paid off. Since 2013, when it was still struggling post-financial crisis and Goldman Sachs bought a stake in the firm (amid a gigantic public furore into the influence of the US investment bank on a state utility), it has increased its profitability – thanks to its offshore wind division.
Renewables are expensive and controversial. While they make sense environmentally, they require hefty state subsidies in the transition period and transitioning too fast can be a costly burden. Certain types can also be less reliable, such as solar and wind, as they are dependent on certain weather conditions.
In the UK (where Dong makes large profits), energy secretary Amber Rudd has called for deep cost cuts to offshore wind farms if they wish to receive billions of pounds of new subsidies.
But – and excuse the pun here – they’re the way the wind is blowing. Political pressure to implement and raise renewables targets mean that they’re here to stay. They just make long-term sense, despite their short-term challenges.
Perhaps it is a little simplistic to say that oil is the past and renewables are the future, especially at a time when the former is relatively cheap and the latter still expensive. And oil is still one of the world’s major energy sources, while renewables are a mere pipsqueak. A pipsqueak still relying on handouts from mum and dad.
I’m sure bankers and investors will be able to profit from Aramco’s IPO more than Dong’s, despite the changing fundamentals.
But with a move to greener energy sources inevitable in the developed world and oil reserves (and revenues) depleting, I wouldn’t be surprised to see the balance changing – after all, the vampire squid must be smelling money…