Energy analyst Monica Enfield said the A.P. Moller Maersk Group’s oil business is at a crossroads in a market beset by unexpectedly low prices and for-sale assets.
The future of the A.P. Moller Maersk Group’s oil business should be viewed through short-term and medium-term lenses, according to an energy analyst that tracks the company.
In the short-term, Maersk finds itself in a position similar to almost all oil companies large and small, said Monica Enfield, director of research and advisory for Energy Intelligence.
“I don’t think Maersk is singularly at a disadvantage,” Enfield said in an interview with American Shipper Wednesday. “Maersk, like everyone, has done all the necessary things to minimize the impact of lower oil prices – delay projects that aren’t economic at the moment, cut costs.”
The discussion came a week after Maersk announced it was reorganizing itself into two divisions – one focused on transportation and one on energy.
Maersk’s oil business faces more questions in terms of its mid-term strategy, Enfield said.
“Fundamentally, the reorg doesn’t change Maersk Oil’s short-term strategy (for its oil business),” she said. “They have capital committed to three large upcoming projects, which is critical for production growth. But, there is much uncertainty over where Maersk’s future reserves growth will come from. Natural field maturation in Denmark, unfavorable economics at Angola and Brazil discoveries, and slow growth from producing assets underpin the company’s medium-term growth challenges.”
Maersk’s position in the oil industry is far different from the lofty position it occupies in the container shipping industry, where it’s the largest single operator of vessels and capacity. In the oil business, Maersk ranked 99th in Energy Intelligence’s Top 100: Global NOC and IOC Rankings report, and Enfield said it is likely to drop out of the next version due to the loss of a concession in Qatar that accounted for 42 percent of its overall production.
The equivalent carrier in Alphaliner’s top 100 carrier rankings would be Shin Yang Shipping, with 4,654 TEUs of fleet capacity, compared to Maersk’s nearly 3.2 million TEUs of capacity.
To put Maersk’s relative size in the oil industry in context, it produced 312,000 barrels of oil equivalent per day in 2015. For comparison, the world biggest oil company, Saudi Aramco, produces 12.5 million barrels of oil per day, while ExxonMobil, the biggest U.S. company, produces 6.5 million barrels a day, according to Forbes.
“Maersk is a relatively small global independent company,” Enfield said of Maersk’s production, adding that Maersk is classified as an independent exploration and production (E&P) company that’s not involved in downstream refining or marketing. Many of the largest oil companies in the world have vertical integration far upstream and downstream in the energy business.
The steep drop in oil prices starting in 2014 and weaker returns likely compelled Maersk to examine the future of its oil business more intently. For years, its investment in energy had provided a hedge against rising fuel prices, the single largest operating cost for its shipping business.
But a drop in global trade, and thus container volumes, has coincided with those lower oil prices, hitting both cornerstones of the Maersk Group hard.
Enfield said Maersk’s moves leading up to the drop in oil prices were much in line with those of the rest of industry.
“I don’t think they did anything wrong,” she said. “Maersk Oil was following industry trends.”
That is, they were pursuing growth opportunities in a perceived “era of scarcity” in the oil business, as Energy Intelligence calls it. With the theory that so-called “peak oil” was nearing, energy companies around the world were scrambling to buy assets and take bets on potential production assets, even if those assets were expensive to buy and develop.
But that was in the $100-plus-barrel-a-day era, not the current sub-$50-a-barrel days.
Under the high-price conditions, oil companies were compelled to pursue opportunities, even for high-priced assets, or ones where extraction is expensive.
From an energy perspective, Maersk Oil has said the recent corporate reorganization will focus it back on its traditional stronghold in the North Sea. Enfield said that there will be a gap between Maersk losing its Qatar concession in July 2017 to new production starting at three North Sea sites between 2017 and 2019. Two of those, in the U.K., are Maersk-operated while the third, in Norway, Maersk has a stake in the giant Statoil-operated Johan Sverdrup field.
But she said Maersk may be successful with a strategic refocus on the North Sea, where production contract structures are more favorable than in some of the areas it had expanded to in the Middle East and Africa.
“Maersk Oil aims to focus more closely on its key competencies within a narrower geographical footprint,” Enfield said. “The company will seek to benefit from scale in a smaller number of basins. This represents a logical response to the current ‘era of abundance,’ requiring an E&P company to reorient away from growth and accessing resources at nearly any cost, to focus on value and delivering producing projects as efficiently as possible.
“This calls into question Maersk Oil’s large and costly development assets in Brazil and Angola. The company may decide to rationalize these and other global assets to bolster its cash position to deploy on North Sea developments and potential acquisitions.”
At a broader corporate level, if the reorganization is intended to help Maersk eventually divest itself, partly or wholly, from the oil business, it is likely cautious about the timing, seeking to maximize value of Maersk Oil or individual assets, Enfield said. But many firms have put assets on the market to reduce budget strain and improve cash flow, and many others have been forced into bankruptcy or restructuring, creating multiple opportunities for buyers.
She said the company could also potentially look to spin off its drilling and services units within the energy division, particularly if oil prices recover and those ancillary businesses become more valuable.
Another dynamic at play is that private equity groups are flushed with cash and looking to invest in oil. Enfield pointed to an EY study in June that found a quarter of global private equity firms were eyeing investment in the oil and gas sector this year, with 43 percent foreseeing acquisitions in early 2017.
“There are very low barriers to entry in the oil business,” she said. “There’s a lot of private equity money ready to invest in the sector. The market has been waiting for prices to stabilize. And now that we’ve stabilized in the $45-$50 per barrel range, it’s given more confidence in (mergers and acquisitions) activity. Just this quarter, we’ve seen more activity, because at least now you can appropriately value your asset. This may help Maersk Oil achieve better prices for assets it wants to rationalize, and even the parent company if it seeks to spin off the oil business.”
Enfield noted, however, that oil investment is a long-term play, with companies looking 25 years out. In that way, it somewhat mirrors investment in container shipping infrastructure. Maersk invests in ships that will be delivered in three years with the expectation that they will be valuable assets to serve a trade for a decade or more beyond that.
Future of Maersk Oil a question of scale and timing
