Crude crash could spell trouble for Maersk

Danish shipping giant A.P. Møller-Maersk’s stock has fallen dramatically in the past year as weak global trade growth has hurt its container shipping business and plunging crude prices have affected its normally reliable oil revenues.    The new year has not been kind to the Maersk Group’s normally solid stock, and neither was 2015 for that matter.
   Shares of A.P. Møller-Maersk A/S have dropped nearly 10 percent since the last day of trading in 2015, from 8,975 Danish krone (U.S. $1,304.46) on Dec. 30 to 8,080 Danish krone as of market close yesterday. That’s down an astonishing 50.8 percent from the 2015 peak price of 16,410 Danish krone per share reached back in March.
   The massive Danish shipping conglomerate has around 900 different subsidiaries and divisions, and had previously been able to lean on its lucrative oil business in lean times for container shipping. In 2015, however, the company was hit with what one analyst calls a “toxic cocktail” of weak shipping demand and the precipitous drop in global crude prices.
   Stig Frederiksen, an analyst with financial services group Nordea, said that unlike in prior down years for the shipping industry – during the global economic recession for example – Maersk’s oil business will likely take a loss in 2016. And “it’s now become the oil price that’s the main driver for Maersk’s share [value],” he told Bloomberg in a recent interview.
   Maersk Oil previously set its break-even price for crude oil at around $55 a barrel. Cost cutting measures at the company, including workforce reductions, might have lowered that number slightly, but Frederiksen estimates it is still significantly higher than current crude prices.
   “Maersk Oil will definitely lose money in 2016 if oil prices stay at this level,” he said. “It looks like it will be a very tough year” for A.P. Møller-Maersk.
   Crude oil prices have continued their dramatic slide in 2016, falling to 11-year lows due to growing global oversupply and persistent reports that oil producing countries plan to maintain current output levels.
   Brent crude, the global benchmark for oil prices, closed at $31.55 per barrel on Monday, down 72.5 percent from $114.81 per barrel in June of 2014 and 52.8 percent from the 2015 peak price of $66.81 per barrel on May 15.
   2015 marked the third annual decline in oil prices and global oversupply could be exacerbated if the Organization of Petroleum Exporting Countries sticks to its current output levels. OPEC said in December it plans to continue aggressively targeting market share regardless of the plunging prices.
   According to estimates compiled by Bloomberg, most analysts expect the price of Brent to rebound to around $60 a barrel by the end of the year. That being said, analysts at this time last year predicted oil would reach nearly $80 per barrel by the end of 2015.
   Analysts at Morgan Stanley, on the other hand, have predicted global oil prices could fall as low as $20 a barrel during 2016 due, in part, to a rapid appreciation of the U.S. dollar.
   “Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency,” the analysts wrote in a recent research note. “The U.S. dollar and non-fundamental factors continue to drive oil prices.”
   Frederiksen noted, however, that he expects Maersk Line, the world’s largest container carrier, will remain profitable in 2016 despite weak global growth projections likely affecting demand.
   In December, Maersk Line began the process of reducing its workforce, eliminating 110 positions at its headquarters in Copenhagen as part of a plan announced in November to reduce sales, general and administration costs by $250 million. At the time, the ocean carrier said it would reduce its landside staff of 23,000 by 17 percent (around 4,000 jobs) by the end of 2017, but that it would seek to reduce layoffs through “managing natural attrition.”
   That announcement came just a few days before the Maersk Group reported disappointing top line profits and revenues for the third quarter of 2015 and a few weeks after Maersk Line significantly downgraded its expected full-year profits.
   The group posted a profit of $778 million in the third quarter ending Sept. 30 compared with nearly $1.5 billion in the same 2014 period, attributing the decline primarily to the effect of falling container freight rates. Underlying profits for the Maersk Line unit fell 63.1 percent to $243 million in the third quarter, and lower oil prices caused profits at Maersk Oil to drop a whopping 85.7 percent year-over-year to $32 million.