November 18, 2012 5:25 pm

Focus on oil exposes Maersk to volatility

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AP Møller-Maersk’s name is synonymous with container shipping. But now the Danish conglomerate with interests from oil tankers to banks is trying to educate investors about the other, more successful parts of its business.

The 108-year-old group held its first capital markets day last month for investors to see the heads of Maersk Oil and APM Terminals – the Danish group’s oil production and ports businesses.

The reason, explains Nils Andersen, Maersk’s chief executive, is simple: together with its oil rig unit, those businesses have provided the profits and stability in recent years. By contrast, Maersk Line, the world’s biggest container shipping line, has lost money and been incredibly up and down, meaning it will not receive much investment in the coming years.

“Shipping has not just been volatile. It has also been not so profitable. We think it is important to grow in industries that have given us better returns,” he says.

But the focus on oil and drillin,exposes Maersk to another source of potential volatility: the oil price. “Both [the oil price and shipping] are very cyclical areas. The oil price is very dependent on the economic cycle as is containers,” says Dan Togo Jensen, analyst at Handelsbanken.

However, Jakob Thomasen, chief executive of Maersk Oil, retorts: “We have been dependent on the oil price for quite a while.” He means that Maersk Line’s profitability depends on a low fuel price. That gives Maersk as a group somewhat of a natural hedge if a low oil price starts to hurt Maersk Oil.

For several years Maersk Oil has been the main profit driver for the group, but Mr Thomasen says returns will be more meagre in the coming years because they had been flattered by a lack of investment. An average return on invested capital of more than 30 per cent in the past three years – against an average for its rivals of 8 per cent – is due to come down to 10-15 per cent as Maersk invests heavily.

“We don’t plan to stop being the profit engine, but there will be years of lower returns . . . Our focus needs to be on execution,” says Mr Thomasen.

Both Maersk Drilling and APM Terminals are expected to have net profit of more than $1bn by 2018, up from $500m and $650m last year respectively. That would not be possible without large investments.

Maersk Drilling has already ordered seven rigs, worth $4.5bn, since 2011 to be used in deepwater drilling and Claus Hemmingsen, chief executive, says another $5bn investment is needed to reach the profit target.

What counts for Maersk is the predictability of its business. Mr Hemmingsen says its rigs are already fully booked for next year, more than two-thirds full for 2014 and over half reserved for 2015. “That is, of course, comforting,” he says.

But challenges remain, not least with the pace of expansion. The drilling business needs to almost double the number of employees from its 3,000 and is now on Facebook to attract workers. “Because the whole industry is growing, there is a huge pressure on people,” Mr Hemmingsen says.

For its own part, Maersk Line executives say the lack of investment in the next few years is a welcome push for them to perform better. “We are actually very pleased with that. We want to earn the right to invest in new ships,” says Jakob Stausholm, Maersk Line’s finance director.

But some analysts say that, despite the emphasis on its other businesses, container shipping remains key to how much the group earns.

Mr Jensen says: “It is a lot about shipping because the volatility is so big. It is Maersk Line that decides if the group will earn 10bn or 20bn. It is not oil or drilling. That is why [container shipping] is so much in focus.” 

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